This guide provides an explanation of the key terms and considerations when creating a shareholder agreement. Here we elaborate on the step-by-step guidance we provide you when answering our document questionnaire.
Review the basic steps you will need to follow before and after completing a shareholder agreement. This includes what information you will need to collect, how to sign and witness your agreement, when to make updates, and which related documents you should complete.
A shareholder agreement is essentially an arrangement between all the company's shareholders on how they will manage the company business. The shareholders can customize their agreement to suit the company's individual needs. The arrangement could include, for example:
The provisions within this shareholder agreement capture all issues of major concern to most shareholders, treating them fairly regardless of their ownership percentage, and aims to clarify and streamline the decision-making process.
When adding the company name and address, enter them exactly as they appear on your articles of incorporation filed, or to be filed, with the state.
Enter each shareholder's name and address, and identify whether the shareholder is an individual or business entity. Shareholder information is necessary to identify the shareholders and create an official record of where to send shareholder notices on important company issues that require the shareholders' approval or decision. This information will appear in Exhibit A: Schedule of Shareholders.
Enter each shareholder's ownership in the company by identifying the types of share classes and the number of shares per class owned. This information is necessary to establish voting rights and to calculate the company's value per share. The percentage breakdown will appear in Exhibit A: Schedule of Shareholders.
When completing the classes of shares for the company, it is helpful to double check that your company's share structure is in line with your C corporation or S corporation). For example, some particular features of an S corporation include the following:
If you have any questions about the structure of classes of shares for your company, consult an attorney for an evaluation of your company's structure to ensure appropriate compliance.
A proxy, if allowed, is a person or entity who represents a shareholder at a shareholders' meeting. The proxy acts according to the instruction of the shareholder he or she represents. Allowing proxies helps the shareholders reach the requisite number of shareholders required for meetings to proceed (called "meeting quorum") and allows the shareholders the ability to participate when they are unavailable during the time set for shareholders' meetings.
The shareholders can agree to fill the board of director positions through various methods. The most common ones are as follows:
A "managing shareholder," if appointed, is a shareholder who takes primary control over the company as the president or chief executive officer. When shareholders agree that a shareholder should be a "managing shareholder," they are approving a corporate structure that gives the managing shareholder the right and obligation to make most of the decisions of running the company without the need to continuously consult and obtain approval from the shareholders.
Your company may wish to designate a managing shareholder if the shareholders trust the managing shareholder's ability to operate the business or want to make decision-making happen more quickly so the company can be more agile.
Although the managing shareholder has a lot of leeway in controlling and managing the company, the following decisions require further approval by a supermajority (two-thirds) of shareholders to:
The shareholders can remove any of these actions from the list of decisions requiring additional shareholder approval by adding in Exhibit B: Additional Terms that "Notwithstanding any provision regarding decisions by the Managing Shareholder requiring further approval by a supermajority of Shareholders, the Shareholders hereby remove these decisions from those provisions herein: [for example, 'to cause the company to enter into any guarantee].'"
If any shareholders are also officers, insert their name in the box under the appropriate title. These shareholders may hold these officer positions as long as they are shareholders, which eliminates the need for the board of directors to reelect the officers at regular intervals during the life of the company.
However, shareholders may be terminated from their officer positions for violating any rights or obligations towards the company including, but not limited to, the following:
These violations are serious enough that the shareholders may be removed from their officer or employee position at the company and be required to dispose of their shares in the company, forcing the shareholder out of the company ownership position.
Shareholders can agree to a general dividend distribution policy for the managing shareholder or the board of directors to follow. The following are the most common policies used by companies:
The shareholders may agree by supermajority vote to close down the company. During the winding-up process, the company's assets will be applied against the company's liabilities as required by law. This provision describes those debt priorities.
This shareholder agreement retains for shareholders the right to make the most important business decisions by unanimous vote as listed below:
The managing shareholder and/or board of directors may not act alone on these decisions without the approval of all of the company's owners.
If the shareholders so agree, they may receive the first right of refusal when company shares become available for purchase. If and when shares become available for sale, the company or selling shareholder must first establish a fair market value for the shares. If any or all of the shares available for sale are not purchased by the shareholders having the right of refusal, then the remaining shares may be offered to third parties for purchase.
Share valuation is crucial to both the buyer and seller. The shares must be valued fairly in order for the transfer transaction to be legitimate. As the company share value may change and is hard to predict, this agreement allows the shareholders to predetermine and write in the share value for each share class.
This is only a starting point for the valuation negotiation between the selling shareholder and the buyer. If this predetermined value is out of date, the agreement provides that the share valuation will be based on the fair market value of the company's net assets. The valuation question can also be submitted for arbitration if parties cannot come to an agreement.
You may choose to include the following protections for minority and majority shareholders upon a sale of company shares to a third party:
Shareholders agree that, while there are many options to resolve disputes, often alternative dispute resolution (ADR) is much more effective at maintaining shareholder relationships and is more cost-effective than filing suit or claim in arbitration.
Therefore, if and when a dispute arises, the shareholders may—and are highly encouraged to—engage in voluntary negotiation and mediation first before taking the issue up to mandatory arbitration as the last and final method of resolving any disputes. Unless otherwise dictated by law, the company's disputes should not be resolved in a court of law.
Shareholders agree to place the interest of the company first during their ownership and for limited periods after their ownership ends. These obligations include not competing with the company for business opportunities that may arise, not poaching talent from the company, and not using or divulging the company's trade secrets.
The legend is mandatory disclosure language that must be included in any company stock certificate to inform any buyers that there are certain transfer restrictions and shareholder limitations to the stock certificate. The buyer should do his or her own due diligence and assess the acceptability of these limitations and restrictions.
This shareholder agreement may only be amended or terminated by approval of all the shareholders. However, it could also terminate when the company is no longer an officially registered company capable of operating business within its registered state.
You will find the complete list of all shareholders to the company here along with their notice information and ownership interest. Ownership interest is broken down into the number of shares each shareholder owns in each class of shares issued by the company. These are all the individuals who must be notified whenever notice is required for any reason according to the company's shareholder agreement or corporate bylaws. It is the definitive record of company ownership until this agreement is terminated, replaced, or updated.
Each shareholder listed in Exhibit A must sign the Shareholder Signature Page. The shareholder agreement is not effective until all shareholders agree and execute the agreement.
Additionally, if a shareholder is an individual and has a spouse or registered domestic partner, the spouse or registered domestic partner also must sign the Shareholder Signature Page to agree to the shareholder agreement. This is necessary because, in certain states and under particular circumstances, the shares of a company may be considered property owned jointly and equally by a shareholder and the shareholder's spouse or registered domestic partner. By signing the agreement, the spouse agrees that the shareholder may act alone on behalf of the company. However, the shareholder must give prior written notice to his or her spouse of any sale or other disposition of any company interests belonging to the shareholder and spouse.
The signing shareholder and spouse or registered partner, if any, may have the shareholder signature sections notarized using the Notary Acknowledgment page to confirm the validity of the signature.
The original or a copy of the shareholder agreement along with the executed Shareholder Signature Pages should be stored and maintained by the secretary at the corporation's principal executive office or such other place as the managing shareholder, if any, or board of directors may decide.
As you complete your shareholder agreement, you will need to provide certain relevant information. This includes shareholder names, addresses, and stock ownership. You will also need dividend distribution preferences and company officer details.
Use the information you collected to complete the agreement. We make this easy by guiding you each step of the way and helping you to customize your document to match your specific needs. The questions and information we present to you dynamically change depending on your answers and the state selected.
It is always important to read your document thoroughly to ensure it matches your needs and is free of errors and omissions. After completing the questionnaire, you can make textual changes to your document by downloading it in Microsoft Word. If no changes are needed, you can simply download the PDF version and sign. These downloads are available by navigating to the Documents section of your account dashboard.
When signing the document, be sure to follow any additional instructions related to signing and witnessing the document. Any such instructions will either be located next to the signature line or in the instructions attached at the end of the document.
If a notary or other witness is required, you must wait to sign the document until they are present.
At a minimum, all parties that sign the document should receive a copy once it is fully executed (everyone has signed). Other interested parties many need or want copies as well. Be sure that you store your copy in your corporate records. It is a good idea to keep both a physical and electronic copy.
It is easy to forget the ins and outs of your shareholder agreement. Periodically reviewing it will help you stay familiar with any responsibilities or requirements so that you can determine when it needs changes or additions. As your policies change or new laws pass, you will need to update your agreement.