Definition of Stockholder Agreement

 Setting up a business can be quite an accomplishment in one’s life. Having friends and family as business partners is something that every individual dream of because of the trust shared among the members.

However, you cannot always be sure about not falling out with them because there will be times you disagree with each other, so you need to draft a shareholders’ agreement.

While it may sound insane to your friends and family, but it can be the best step to take when dealing with people you trust. Like what they say, there can be trouble in paradise.

What is a shareholders’ agreement?

A stockholders’ agreement is an arrangement among stockholders of a given company by the shareholders themselves. It contains a draft about the rights and privileges of the shareholders.

It also outlines how the company will be operated and how the relationship of the shareholders would be. The agreement serves as a guide to protect the shareholders’ interests, especially if things do not go as planned, and there may be some changes.

The shareholders’ agreement is always drafted by the first group that started the company, and the shareholders can amend it to better suit their interests. The shareholders’ agreement will:

  • Regulate the sale of shares.
  • Outline the shareholders’ rights and obligations.
  • Describe how the company will be operated.
  • Provide an element of protection for minority shareholders and the company.
  • Define how important decisions are to be made.

 Do I need a shareholders’ agreement?

As long as you are a shareholder in a company or cooperation, the shareholders’ agreement must be documented. You will need it even if you are a minority or a majority shareholder.

Most companies have majority and minority shareholders, and some even have equal shareholders. The majority shareholder owns over 50% of a company’s stocks, while the minority shareholder holds less than 50 % of the shares. Equal shareholders own 50/50 of the company’s stock.

A minority shareholder needs a shareholders’ agreement because, without one, they will have little to no control or say in the company’s operations.

The company always operates on the majority shareholders’ decision, and even if there could be rights for the minority shareholders, there is a special resolution that overpowers those rights. A minority shareholder needs a shareholders’ agreement to have an opinion in the companies’ decision-making.

A majority shareholder also needs a shareholders’ agreement, just if they want to sell their shares. Still, a minority shareholder is unwilling to agree that forcing that shareholder to sell their shares is essential.

A minority shareholder may also want a provision implying that when a shareholder wants to buy a majority shareholders’ shares, then the shareholder can only sell the shares if an offer of the same kind is made to all the shareholders, including minority shareholders.

Equal shareholders also need to draft a shareholders’ agreement that protects their interests if one shareholder might want to sell or buy shares. There have been very few instances where a single shareholder owns cooperation.

Being in such cooperation requires you to accept that all decisions that will be passed on are final. Minority shareholders in these companies are not usually consulted on decision making and they are not allowed to ask about the company’s operation. Nevertheless, all companies need to have a well-crafted agreement.

 

What my shareholders’ agreements should include?

A shareholders’ agreement only oversees its signatories. Other than what the cooperation law is set to protect, there are certain things that you need to include in your shareholders’ agreement:

  • Dividend policy

A stated dividend policy may have an effect on the value of the companies’ share and tax purposes. These dividends are usually cut off the company’s profit, and each company has a different way by which the rewards are divided among the shareholders.

A dividend policy should be set, and it can be placed in two ways. Shareholders’ agreement addresses issues regarding shareholders alone such as the decision to sell the company.

Clauses can be made to the association’s articles to render powerless the directors’ powers to make decisions without the shareholders’ approval.

An example is that it may be agreed that:

  • Shareholders can or should waive their right to receive dividends in particular circumstances.
  • A formula is put across that will be used to share dividends, which may not be proportional to the shared ownership.

 

  • Voting rights and procedures

Some companies allow an individual to vote if you have stocks in their company, but some require one to vote even if their stores have reached a certain percentage.

You should secure your voting rights since it will keep you in the loop of how the company is run, and you will also be invo0lved in the company’s decision-making. Voting rights also gives you the privilege to vote in and vote out directors.

Procedures are in place since they include provisions for the number of members allowed to vote in a given forum.

Resolution of shareholders’ dispute. A disagreement is inevitable when it comes to running cooperation. An argument may be resolved quickly between shareholders, but some are difficult to determine.

Shareholders may opt to sell or transfer their shares, which may affect the company’s profits. The share holder’s agreement should contain some rules and steps to take when a disagreement has gone overboard.

Disputes are part of life. It would be best if you considered including methods for resolving conflicts in case one arises between shareholders.

  • Business plan

It would be best if you considered having a business plan in your shareholder agreement to ensure that you are all pursuing the same vision.

The Director’s freedom of action may include investment in new capital or the charge of the company’s assets. Directors are people whose decisions are well appreciated. When their decisions are not directed towards a company’s visions, they need to vote them out.

  • You may raise capital to avoid diluting existing shareholders. A company can be going through a phase where the profits are increasingly high. Existing shareholders’ profits may be cut because of the unfair distribution of company funds.
  • Freedom of disposition of shares.

A minority shareholder is usually powerless, and therefore, the value of their minority shares may be correspondingly reduced.

Disposition of shares may be overridden if all claims are treated as being worth the same. However, restrictions will affect the value of the shares. Wherever they are set out, always remember to carry tax implications if they are an officer or company shareholder.

  • Transfer and creation of new shares of stock

Ownership of stocks may change one day. People give out shares as presents and even as an inheritance to relatives or look for another source to invest their money.

Selling and transferring stock is different because it changes the own course depending on the number of shares to be sold or transferred.

An agreement needs to be put in place to settle the score that comes with selling and transferring stocks shares. The arrangements should make provisions that favor and protect the interest of the current shareholders.

  • Minority shareholders inclusion.

 

 

How do I set up a shareholders’ agreement?

A new company with few shareholders requires that you draft a unanimous share holder’s agreement where all shareholders are parties in the contract.

It may be difficult for a large company since large companies require meeting first before drafting a shareholders’ agreement. Therefore, you will develop the content of what is to be included in the shareholders’ agreement and discuss it before it is crafted.

If you are new to the drafting of a shareholders’ agreement, you should seek help from online sources like the northwest registered agent and Zen business. Seeking help from an expert is not always a bad idea because they will guide you through what is to be included in the shareholders’ agreement.

There are also steps that one should follow when drafting a shareholders’ agreement. They include:

  • Designate parties to the agreement
  • Set forth definitions, which are the legal meaning of words used throughout the agreement.
  • Explain the structure of the company.
  • Outline procedural rules.
  • Establish the observer’s rights.
  • Detail the observer rights and obligations.
  • Set forth the cooperation’s obligations.
  • Describe when shares can be transferred.
  • Allow for cooperating purchases.
  • Establish co-sale and tag along with rights
  • Include the drag-along rights
  • Sample shareholders agreement.

After drafting a shareholders’ agreement, make sure to involve an attorney who will review the deal. You should make sure that the contract is directed to address the specific need of your company.

Conclusion

A shareholders’ agreement is a vital document of any cooperation or company. It is so much easier to run a company with a shareholders’ agreement since it helps corporations run with ease.

Above it all, it safeguards all shareholders’ interests. A shareholders’ agreement should encompass the deal that was agreed upon by all shareholders of cooperation. Interested in owning shares of stocks?

Here you have been provided with the proper guidelines of what to consider before becoming a shareholder.

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