Shareholder agreements are created to protect the rights of the shareholders on your company. They are binding documents, and should be written with precision and specificity. The provisions in the agreement will address issues such as voting, dividends, mergers and acquisitions, and amendments.
The advantages of shareholder agreements
- Limited liability.
The shareholders have limited liability in the company. The shareholders will not be held liable to debts of the company unless they are noted in the Shareholder’s agreement. Thus, if a company is sued, the shareholder’s personal assets will not be affected.
- Voting rights.
The shareholders can vote on major decisions that are vital to the corporation and its future development. Such issues may include selling the shares and other important issues pertaining to the corporation’s future operations. The voting process is usually done by a majority vote from all shareholders and is binding which means that it cannot be changed at a later date without consent from all shareholders involved in the business.
- Dividend payments.
Shareholder agreements will specify when and how dividends are paid out to shareholders. They also specify how much each shareholder qualifies for in dividends and other share benefits like the option to buy shares at a discount from their original purchase price.
- Corporate actions and transactions
Shareholder agreements will control transactions of the corporation. It will regulate business deals involving a corporation by specifying what that deal requires or requires that it be approved by shareholders before it can be put into effect . This way, the corporation takes care of the needs of shareholders who need to approve important transactions such as buying new equipment, developing new products and hiring new workers.
- Rights and restrictions of shareholders.
Shareholder agreements also detail the rights and restrictions of stakeholders in a corporation. A shareholder agreement will specify what percentage of the corporation each shareholder has, how shares are distributed to new shareholders, and whether that person can sell the share or not. Furthermore, if a shareholder ever leaves the business, it specifies what happens to their shares then on. For example, they may be entitled to a pro-rated portion of their original cost or they may get nothing at all.
- Corporate transactions.
The shareholders’ agreement should also specifically state that any transactions, mergers or acquisitions (including selling the entire company) need to be approved by all shareholders, especially if such transactions can significantly affect the future of the corporation and its operations or resources when it’s at stake for all stakeholders involved in the corporation.
- Diligent shareholder agreements.
Shareholders’ agreement should be prepared with great care and diligence to avoid any disputes that may arise after the document is signed. This way, the shareholders will know what they have agreed upon.
- Written agreement to protect against misunderstandings.
For all agreements to be binding and enforceable, they must be written in a formal format, notations and signatures must be done correctly on each page, and the institution of each should correspond with the language used in the agreement as well as in good English.