What is a 'Shareholders' Agreement'

A shareholders' agreement, also called a stockholders’ agreement, is an arrangement among a company's shareholders that describes how the company should be operated and outlines shareholders' rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.

BREAKING DOWN 'Shareholders' Agreement'

The shareholders' agreement is intended to make sure that shareholders are treated fairly and that their rights are protected.

The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions.

A shareholders’ agreement includes a date, often the number of shares issued, a capitalization (or “cap”) table, outlining shareholders and their percentage of company ownership, any restrictions on transferring shares, pre-emptive rights for current shareholders to purchase shares (in the event of a new issue to maintain their percentage of ownership), and details on payments in the event of a company sale.

Example of a Shareholders Agreement for an Entrepreneur

Many entrepreneurs creating startup companies will want to draft a shareholders’ agreement for initial parties. This is to ensure clarification of what parties originally intended; if disputes arise as the company matures and changes, a written agreement can help resolve issues by serving as a reference point. Entrepreneurs may also want to include who can be a shareholder, what happens if a shareholder no longer has the capacity to actively own his or her shares (e.g. becomes disabled, passes away, resigns, or is fired), and who is eligible to be a board member.

As with all shareholder agreements, an agreement for a startup will often include the following:

  • A preamble, identifying the parties (e.g. a company and its shareholders)
  • A list of recitals (rationale and goals for the agreement)
  • Details of optional versus mandatory buying-back of shares by the company in the event that a shareholder gives his/her up
  • A right of first refusal clause, detailing how the company has the right to purchase a selling shareholder’s securities prior to she/he selling to an outside party
  • Notation of a fair price for shares, either re-calculated annually or via a formula
  • A potential description of an insurance policy

Shareholder agreements differ from company bylaws. While bylaws are mandatory and outline the governing of the company’s operations, a shareholder agreement is optional. This document is often by and for shareholders, outlining certain rights and obligations. It can be most helpful when a corporation has a small number of active shareholders.

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