What is a shareholder agreement and what are the terms it must contain?

Corporate Shareholders’ Agreements address the rights and responsibilities of the shareholders towards each other and the company, the restrictions and preferences associated with different class of stock if any, methods and procedures of taking actions related to the share ownership, company management, exit strategies, warranties and other matters, which may affect business operations. This agreement must be extensive and detailed to cover the interests of all parties and all possible future developments.  The most common provisions

 

Management Provisions

Board of directors

Director and shareholder meetings

Voting arrangements

Deadlock

Subsidiaries

 

Transfer of Interest

Restriction on transfer

Right of first refusal

Drag-along rights

Tag-along rights

Pre-emptive rights

Anti-dilution

Valuation

Payment terms

Co-sale

 

Non-compete and other agreements

Non-compete

Confidentiality

Corporate opportunities

 

Information Rights

Financial statements

Inspection rights

 

Representations and warranties

Terms and termination

Release of liability

Reimbursement of expenses

Successors and assigns

Third-party beneficiaries

Governing law and jurisdiction

Dispute resolution procedures

Dissolution

Shareholder agreements usually apply not only to the present shareholders but future ones as well. Attorneys include the provision stating that in case of interest transfer the transferee must sign an agreement to accept the corporation’s shareholder agreement. It ensures that interest of the present shareholders will not be affected by any future transactions. The shareholder agreement is one of the most important documents of the company and accordingly should only be drafted by an experienced business attorney. There are no sample documents that cover all possible interests of the parties and protect from all possible liabilities. The danger with forms that are available for download online is not that they may contain legally unsound provisions, but that they are extremely limited. A person, who is not a business attorney, is able to see only what is included there, but cannot know what else is available, foresee all possible consequences, and fully understand legal interpretations under existing corporate statutes and legal precedents. It is strongly advised to discuss the nature of the business and interests of its owners with an experienced business lawyer.

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