Shareholder Agreement for Virginia

SHAREHOLDERS' AGREEMENT



OF



_____________________



A _____________________ CORPORATION



Adopted as of _____________

SHAREHOLDERS' AGREEMENT

This shareholders' agreement (the "Agreement") dated _____________ is by and among all the shareholders of _____________ (the "Company"). The complete schedule of the Company's shareholders is listed on Exhibit A, attached hereto and incorporated herein by reference. Collectively, they are the "Shareholders" and individually, a "Shareholder."

RECITALS

  1. The Shareholders desire to enter into an Agreement to provide for the management, division of profits, division of assets upon liquidation, and other matters, interests, obligations, liabilities, ownerships, and rights in the Company as permissible by law.
  2. The Shareholders believe it is important to provide for substantial restrictions on share transfers, to limit the persons permitted to become shareholders, to provide for participation and/or employment of Shareholders in the affairs of the Company, and to make provisions with respect to the Company and the relationships between the Shareholders to the Company and among themselves.

AGREEMENT

The Shareholders therefore agree as follows:

  1. ARTICLES OF INCORPORATION. This Agreement augments provisions within the Company's articles of incorporation. The articles of incorporation is subject to this Agreement. This Agreement will control if there are any inconsistencies between this Agreement and the articles of incorporation. If this Agreement, in whole or in part, terminates or becomes invalid for any reason, the provisions in the articles of incorporation will continue in full force and effect, unless and until amended in accordance with any applicable law.
  2. BYLAWS. This Agreement may augment provisions within the Company's bylaws. The bylaws are subject to this Agreement. This Agreement will control if there are any inconsistencies between this Agreement and the bylaws. If this Agreement, in whole or in part, terminates for any reason, the provisions in the bylaws will continue in full force and effect unless and until amended in accordance with any applicable law.
  3. SHARES AND WARRANTIES. The complete schedule of the Company's Shareholders and all issued and outstanding shares are listed in Exhibit A. Each Shareholder warrants that the Shareholder and the Shareholder's spouse or registered domestic partner, if one exists, are
    1. the sole beneficial owners of the shares identified in Exhibit A as being owned by the Shareholder;
    2. not prevented by law, other contractual agreements, or any other reason from entering into this Agreement; and
    3. in possession of the necessary corporate power and authority to enter into this Agreement and to perform its obligations herein.
  4. TRANSFER OF BOARD OF DIRECTORS' POWERS AND LIABILITIES. This Agreement restricts the Board of Directors' powers to manage and supervise the Company to the extent necessary to effect the Shareholders' objectives set out in this Agreement. Additionally, certain Board of Directors' powers are transferred to the Shareholders. The Shareholders acknowledge that, to the extent the Board of Directors' powers are restricted and/or transferred to the Shareholders, the affiliated obligations and liabilities of the Board of Directors are also transferred to the Shareholders.
  5. MANAGEMENT AND CONTROL
    1. Books, Records, and Reports. The Managing Shareholder, if one exists, or the responsible director within the Board of Directors, will maintain the books, records, and other documents as required by applicable law. Notwithstanding any waiver contained in the Company's bylaws, the Managing Shareholder, if one exists, or the responsible director, will prepare and furnish an annual report for the Shareholders. The annual report need not be audited unless upon written request by any Shareholder.
    2. Employment of Shareholders
      1. Subject to any employment agreements between the Company and any Shareholder that may be amended from time to time upon mutual agreement, the following Shareholders will hold the offices listed herein. The Shareholders will hold these offices so long as they own shares in the Company, are active in the Company's business, and are able to perform their duties and responsibilities.
        1. President or Chief Executive Officer: _____________
        2. Secretary or Clerk:____________________
        3. Treasurer or Chief Financial Officer:____________________
      2. The duties and responsibilities of the Company's officers are set forth in the Company bylaws, the respective employment agreements, or as otherwise approved by two-thirds (2/3rds) supermajority consent of all Shareholders. The duties, offices held, compensation rate, and other prerequisites or conditions of employment of any Shareholder may be modified, amended, or terminated by a two-thirds (2/3rds) supermajority consent of all Shareholders. Each of the aforementioned employment agreements may be similarly modified, amended, or terminated upon mutual agreement between the officers and a two-thirds (2/3rds) supermajority consent of all Shareholders.
    3. Termination of an Officer or Director
      1. Except as otherwise prohibited under applicable law or any employment agreement, any Shareholder may be terminated, by Shareholder action pursuant to the Company bylaws, as an officer, director, or employee of the Company.
      2. Termination is effective on the adoption of a written Shareholder resolution, at a meeting duly held pursuant to the Company bylaws, of a written resolution finding that the Shareholder has
        1. engaged in misconduct or a willful breach of this Agreement to such an extent as to render the Shareholder's continued presence as an officer, director, or employee personally or professionally obnoxious or detrimental to the other Shareholders;
        2. been convicted by final decision of any court of any offense punishable as a felony involving moral turpitude;
        3. made an assignment for the benefit of creditors or been declared, or has filed a petition seeking to be declared, bankrupt;
        4. been judicially declared insane, incompetent to manage that Shareholder's non-Company-related affairs, or become physically or mentally disabled or incapacitated as determined by a Company-appointed physician so as to be unable to perform services to the Company in any executive or supervisory capacity, including death;
        5. caused the Company to be convicted of a crime or to incur criminal penalties in material amounts; or
        6. engaged in other conduct constituting legal cause termination.
      3. In the event of any such termination, the terminated Shareholder, including the Shareholder's estate acting on the Shareholder's behalf, agrees to sell to the remaining Shareholders, and the remaining Shareholders agree to purchase, all terminated Shareholder's shares. The remaining Shareholders will make the purchase in proportion to the shares presently owned by them. The purchase price and terms are set forth in the "Valuation" section within this Agreement.
      4. The terminated Shareholder is entitled to receive salary from the Company up to the period ending on the termination date.
    4. Voting of Shares. Each Shareholder must vote, or cause to be voted, the Shareholder's Company shares in such a manner that will carry out the intents and purposes of, and effectuate and implement all of the covenants and agreements in, this Agreement and any employment agreements.
  6. DIVIDEND DISTRIBUTION
    1. Determination of Net Income or Loss
      1. The net income or loss for any accounting period is the Company's gross income less expenses during that period, determined on an accrual basis.
      2. "Gross income" includes, but is not limited to, amounts received from Company investments, gains realized from sale or disposition of any property, and any other Company income.
      3. "Expenses" includes, but is not limited to, any business expenses, salaries, interest on loans or advances including any loans or advances to the Company by Shareholders, taxes, assessments, depreciation of and losses on Company property, bad debts and contingencies requiring proper establishment of sufficiently-funded Company reserves, and any and all other expenses related or incidental to the conduct of the Company's business.
    2. Other Distributions. By two-thirds (2/3rds) supermajority written consent of the Shareholders, the Company may make further distributions pro rata per share if the Company's reasonable and foreseeable financial needs permit it.
  7. DISSOLUTION
    1. Voluntary Dissolution. A two-thirds (2/3rds) supermajority consent of the Shareholders is required for the Shareholders to voluntarily dissolve the Company. Each Shareholder waives the right to reduce this Shareholder consent regarding voluntary dissolution to any level below the two-thirds (2/3rds) supermajority threshold.
    2. Winding Up. Upon commencement of proceedings for dissolution of the Company, either by Shareholders' consent or otherwise, the Company will immediately cease to carry on business except as necessary to wind up the business and distribute its assets.
    3. Proceeds Distribution. During the winding up process, the Company will collect in and realize all its assets. The asset proceeds will be applied in the following order:
      1. To all Company debts and liabilities in accordance with law, specifically including all dissolution and liquidation expenses, but excluding any debts owing to a Shareholder.
      2. To the principal and interest on any outstanding debts owing to a Shareholder.
        1. If the Company's asset proceeds are inadequate to pay the debts in full, the proceeds should be applied according to the indebtedness terms, if any.
        2. If no such terms exist, the remaining asset proceeds will be applied first to all accrued but unpaid interests, followed by the debt principal.
      3. To any undistributed dividends subject to provisions regarding dividend distribution herein.
      4. To the repayment of the Shareholders' purchase price for the Company's shares, in full or, if proceeds are inadequate, in proportion to the aggregate purchase price paid to the Company.
      5. To the Shareholders in proportion to the number of Company shares held by each Shareholder.
  8. MANDATORY SHAREHOLDER ACTION. The unanimous consent of all Shareholders is required to approve the following actions by the Company's Board of Directors:
    1. Amend, repeal, or alter any provisions of the Company's articles or incorporations or bylaws;
    2. Merge or consolidate the Company with another enterprise;
    3. Issue shares, options, or other rights to acquire shares of the Company; or
    4. Convert the Company into a different entity type.
  9. RESTRICTIONS ON TRANSFER
    1. Except as otherwise provided within this Agreement, the Company shares may not be sold, pledged, hypothecated, transferred, or otherwise disposed of, whether or not for value, by any Shareholder until after written notice of the intended transaction or offer has been delivered to each Shareholder and final determination of purchase price for the shares have been determined.
    2. The following constitutes an "Irrevocable Automatic Offer" by the Shareholder, including the Shareholder's estate acting on the Shareholder's behalf, to sell all the Shareholder's Company shares to other Shareholders so long as these conditions exist:
      1. The filing of a voluntary or involuntary petition in bankruptcy by or respecting any Shareholder, unless otherwise dismissed;
      2. The occurrence of any insolvency of any Shareholder;
      3. The making by a Shareholder of an assignment for the benefit of creditors;
      4. The entering into of any composition agreement with creditors by any Shareholders, likely to involve the Shareholder's shares;
      5. The death of any Shareholder;
      6. The physical or mental incapacitation of any Shareholder to manage his or her Company-related duties and affairs; or
      7. Any other event that requires or causes any Shareholder to transfer or dispose of any Company shares.
    3. Offer Notice. If any Shareholder, including the Shareholder's estate acting on the Shareholder's behalf (collectively the "Selling Shareholder") proposes a disposition of all or any part of the Selling Shareholder's shares, the Selling Shareholder must sign and deliver to each other Shareholder (the "Non-Selling Shareholder(s)") a written notice stating the Selling Shareholder's desire to dispose of the designated number of shares. For Irrevocable Automatic Offers, the notice is deemed given when the Non-Selling Shareholders receive actual notice of the bankruptcy or insolvency filing, or other occurrence constituting the automatic offer.
    4. Valuation. Upon actual receipt of notice, the Selling Shareholder and the Non-Selling Shareholders will use their best efforts to agree upon a fair market value of the Company shares in the following order:
      1. The fair market value of Company shares may be set by the Shareholders on an annual basis and communicated by way of a Shareholder Resolution.
      2. If the Shareholders cannot agree on the fair market value of the shares or fail to set the fair market value of the shares on an annual basis for whatever reason, the fair market value will be computed by determining the fair market value of the Company's net assets on the date of the notice and dividing the resulting figure by the number of issued and outstanding Company shares as of the date of notice.
      3. If the Shareholders cannot or do not agree on the fair market value of the Company's net assets on the date of notice, the Shareholders must submit the dispute to mandatory arbitration pursuant to the "Dispute Resolution" section within this Agreement. The arbitration expense is borne by all Shareholders paying pro rata based on their proportion of Company share ownership.
    5. Right of First Refusal
      1. After all Shareholders agree to the final determination of the price per share, the Non-Selling Shareholders have the prior option and right to purchase all or any part of the shares at the determined price within the time period stated within the offer that is no less than fourteen calendar days. The option and right of the Non-Selling Shareholders is proportionate to the number of shares each Shareholder owns and, if any Non-Selling Shareholder does not exercise their option in full within the aforementioned offer period, each remaining Non-Selling Shareholder will have an option to purchase the shares remaining for sale at the price per share so determined and within the additional time period stated within the offer that is no less than fourteen calendar days.
      2. If the Non-Selling Shareholders do not exercise their option to purchase all the shares set forth in the written notice after the expiration of offer periods and at the final determination of price per share, the Selling Shareholder may sell all of those shares to a third party or parties at a price per share and on substantially the same terms as offered to the Non-Selling Shareholders.
    6. The Company reserves the right to refuse to transfer any shares of stock if the Shareholder whose shares are presented for transfer is in any way indebted to the Company or any of the Shareholders with respect to a Company-related loan. The Company will have a lien on each share of stock to secure any Company-related indebtedness due by the Shareholder to the Company or another Shareholder.
    7. The purchase price for shares purchased from a Selling Shareholder pursuant to this Agreement will be paid by agreement between the Selling Shareholder and the respective buyer. As a condition precedent to the buyer's obligation to deliver the purchase price, the Selling Shareholder must deliver the stock certificates with appropriate legends, duly endorsed for transfer, together with any other instruments that may be necessary to convey to the buyer full title to the shares, free and clear of all liens and encumbrances other than provisions within this Agreement. Each Selling Shareholder agrees to take all steps necessary in order to convey that title and to deliver all such documents promptly in connection with any such sale.
    8. Company shares will not be issued unless the buyer is a party to this Agreement or agrees to be bound by and to become a party to this Agreement. The buyer must give a written and legally binding undertaking to be bound by and become a party to this Agreement.
    9. Permitted Transfers. The provisions regarding the restrictions on Company share transfer are applicable to all dispositions of Company shares with the exception that the Shareholders may transfer all or any part of their shares to the following persons or entities without being subject to the aforementioned restrictions:
      1. A spouse;
      2. Any ancestors or lineal descendants or the spouse of any such persons;
      3. Any trust solely for the benefit of the Shareholder or any foregoing persons; or
      4. If the Company is a C Corporation, a corporation wholly owned by the Shareholder or a foregoing person.
  10. DISPUTE RESOLUTION
    1. Voluntary Negotiation. In recognition that negotiation may offer a faster and less expensive resolution than mediation or arbitration, the Shareholders may resolve any and all disputes, claims, or controversies arising out of or relating to this Agreement through informal negotiation. Any Shareholder may decide to forego or stop negotiation at any time.
    2. Voluntary Mediation. In recognition that mediation may offer a faster and less expensive resolution than arbitration, if the Shareholders are unable or unwilling to resolve any and all disputes, claims, or controversies arising out of or relating to this Agreement through voluntary negotiation, the Shareholders may resolve such dispute through mediation. Any Shareholder may decide to forego or stop mediation at any time.
    3. Mandatory Arbitration. The Shareholders hereto agree that any and all disputes, claims, or controversies arising out of or relating to this Agreement that are not resolved by their mutual agreement through voluntary negotiation or mediation will be submitted to final and binding arbitration pursuant to the United States Arbitration Act, 9 U.S.C. 1 et seq.
    4. Default Mediation and Arbitration Service. Unless the Shareholders agree otherwise, mediation and/or arbitration under this Agreement will be administered by Judicial Arbitration and Mediation Service ("JAMS"), or its successor. Any Shareholder may commence the arbitration process pursuant to this Agreement by filing a written demand for arbitration with JAMS, with copies given to the other Shareholders. The arbitration will be conducted in accordance with the provisions of JAMS' Comprehensive Arbitration Rules and Procedures in effect at the time of filing of the demand for arbitration. The Shareholders will cooperate with JAMS and with one another in scheduling the arbitration proceedings and in selecting an arbitrator from JAMS' panel of neutrals. The arbitrator will be a retired or former judge of any appellate or trial court of the State of _____________ and will have substantial professional experience with regard to corporate legal matters.
    5. Arbitration Scope, Terms, and Procedure. The arbitrator will consider the dispute, claim, or controversy at issue in the State of _____________, at a mutually agreed upon location and time within one hundred and twenty (120) days (or such longer period of time as may be acceptable to the Shareholders or as directed by the arbitrator) of the selection of the arbitrator. Notwithstanding the foregoing, the Shareholders agree that they will participate in the arbitration in good faith and will use their best efforts to attempt to conclude the arbitration proceeding and have a final decision from the arbitrator within one hundred and twenty (120) days from the date of selection of the arbitrator, provided, however, that the arbitrator will be entitled to extend such one hundred and twenty-day (120) period for up to an additional ninety (90) days. The arbitrator will deliver a written award with respect to such dispute, claim, or controversy to each of the Shareholders to the arbitration, who will promptly act in accordance therewith. Each party to such arbitration agrees that any award of the arbitrator will be final, conclusive, and binding and that it will not contest any action by any other party thereto in accordance with an award of the arbitrator.
  11. NON-COMPETITION
    1. Each Shareholder agrees that any business opportunity that comes to the attention of the Shareholder while the Shareholder is a Shareholder, director, officer, or employee of the Company and is related to, or directly or indirectly competes with the Company's business, or arises out of the Shareholder's connection with the Company, belongs to the Company.
    2. Each Shareholder agrees that while serving as Shareholder, director, officer, or employee of the Company and for a period of six (6) months thereafter, the Shareholder will not, solely or jointly with others
      1. undertake, plan, organize, or be involved in any way with any business or activity that directly or indirectly competes with the Company's business in the same geographic areas that the Company usually carries out its business; or
      2. divert or attempt to divert from the Company any business the Company enjoyed, solicited, or attempted to solicit from its customer, prior to the Shareholder ceasing to be a Shareholder, director, officer, or employee of the Company.
    3. Each Shareholder agrees that, while serving as a Company Shareholder, director, officer, or employee, the Shareholder will not engage or participate in any other business activities that conflicts with the best interest of this Company.
  12. NON-SOLICITATION. Each Shareholder agree that, while serving as a Shareholder, director, officer, or employee of the Company and for six (6) months thereafter, the Shareholder will not in any way, directly or indirectly, induce any other Company Shareholder, director, officer, or employee to leave their position with the Company or compete with the Company. Each Shareholder agrees to not interfere with the Company's relationship with its other Shareholders, directors, officers, and employees.
  13. TRADE SECRETS. The Shareholders acknowledge that the customer lists, trade secrets, processes, formulae, methods, and technical information of the Company and any other matters that may be designated as confidential by the Managing Shareholder, if one exists, or by two-thirds (2/3rds) supermajority consent of the Shareholders, are valuable and unique assets. While the Shareholder is an officer, director, employee, or Shareholder, and at any time thereafter, each Shareholder agrees never, without the prior written consent of the Company and each of the other Shareholders, to directly or indirectly disclose or use any lists, names, trade secrets, processes, formulae, methods, technical information, or other matters stated herein as confidential information for any purpose whatsoever except as it may relate to authorized Company business.
  14. LEGEND. Each certificate representing shares in the Company will bear the following legend:

    THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR JURISDICTION. SUCH SHARES MAY NOT BE SOLD, TRANSFERRED, OR PLEDGED IN THE ABSENCE OF SUCH REGISTRATION UNLESS REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR THE COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE, TRANSFER, OR PLEDGE IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.

    THE SALE, TRANSFER, OR PLEDGE OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS RESTRICTED BY THE PROVISIONS OF THE SHAREHOLDERS' AGREEMENT DATED _____________, AS MAY BE AMENDED FROM TIME TO TIME. ALL PROVISIONS OF THE AGREEMENT ARE INCORPORATED BY REFERENCE IN THIS CERTIFICATE. COPIES OF THE AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE COMPANY SECRETARY AT THE COMPANY'S PRINCIPAL OFFICES. THE COMPANY WILL NOT REGISTER OR OTHERWISE RECOGNIZE OR GIVE EFFECT TO ANY PURPORTED TRANSFER OF SHARES OF STOCK THAT DOES NOT COMPLY WITH SUCH AGREEMENT.
  15. TERMINATION AND AMENDMENT
    1. This Agreement will remain in effect until the earlier of the Company ceasing to be a corporate entity registered with a particular state according to its corporation code or all Shareholders agree to terminate the Agreement in writing. Notwithstanding any such termination, the provisions in this Agreement regarding restrictions on share transfers, mandatory buy-sell provisions, non-competition, non-solicitation, and protection of trade secrets will remain in effect until all Shareholders agree in writing to a specific termination or until they expire by their terms.
    2. This Agreement may be amended only by a written agreement executed and delivered by each Shareholder.
  16. GENERAL PROVISIONS
    1. Waiver of Law. This Agreement does not alter or waive any provision of any state or federal law except as expressly provided herein, provided, however, each Shareholder hereby expressly waives the provisions of applicable law to the fullest extent permitted in order to uphold the provisions and validity of this Agreement and to cause this Agreement to be valid, binding, and enforceable in accordance with its terms upon each of the Shareholders and their respective transferees, successors, and assigns.
    2. Notices. Any notice under this Agreement is deemed sufficiently given by one party to another if it is in writing and, if and when delivered or tendered either in person or by registered or certified United States mail, with postage prepaid, addressed to the person to whom notice is being given at that person's address appearing on the Company records, in Exhibit A, or any other address as may have been given by that person to the Company for the purposes of notice in accordance with this subsection. A notice not given as described herein will be deemed given if and when it is in writing and actually received by the party to whom it is required or permitted to be given.
    3. Governing Law. This Agreement is governed by and construed in accordance with the laws of the State of _____________.
    4. Captions. Captions to sections, subsections, and paragraphs in this Agreement are inserted for convenience only and do not affect the construction or interpretation of this Agreement.
    5. Counterparts and Duplicate Originals. This Agreement and all amendments may be executed in several counterparts. Each counterpart constitutes a duplicate original of the same instrument.
    6. Successors. Notwithstanding anything in this Agreement to the contrary, any transferee, successor, holder, or assignee of the Company's shares is subject to and bound by this Agreement as fully as though a signatory.
    7. Severability. In the event that any provisions of this Agreement is prohibited by, or unlawful or unenforceable under, any applicable law of any jurisdiction, that provision, to the extent enforceable, will be waived and severed from this Agreement. The remaining terms, conditions, and provisions of this Agreement will continue to be valid to the fullest extent permitted by law.
    8. Recovery of Expenses. Except as otherwise provided within this Agreement, if a dispute arises with respect to this Agreement, the prevailing party is entitled to recover all expenses, including, without limitation, reasonable attorneys' fees and expenses incurred in ascertaining that party's rights, in preparing to enforce, or in enforcing that party's rights under this Agreement, whether or not it was necessary for that party to institute suit.
    9. Remedies. The Shareholders have all remedies for breach of this Agreement available to them provided by law and equity. Without limiting the foregoing, the parties agree that in addition to all other rights and remedies available at law and equity, the Shareholders are entitled to obtain specific performance of the obligations of each party to this Agreement and immediate injunctive relief.
    10. Third Parties
      1. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under this Agreement on any persons other than the Shareholders, the Company, and their respective permitted transferees, successors, and assigns.
      2. Nothing in this Agreement is intended to relieve or discharge the obligation or liability of any third persons to any party to this Agreement or to the Company.
      3. Nothing in this Agreement is intended to give any third persons any right of subrogation or action over or against any party to this Agreement or the Company.
    11. Time. Time is of the essence for this Agreement.
    12. Filing. A copy of this Agreement, as amended from time to time, is filed with the Company's Secretary for inspection by all Shareholders and any prospective purchaser of Company shares.

EXHIBIT A: SCHEDULE OF SHAREHOLDERS



Shareholders Number and Classes of Shares

INSTRUCTIONS FOR YOUR SHAREHOLDERS' AGREEMENT



A shareholders' 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:

  • agreeing to appoint one shareholder to make most of the business decisions,
  • agreeing that the company cannot issue dividend distributions unless approved by two-thirds (2/3rds) of all shareholders, or
  • agreeing that certain shareholders will hold particular officer or board of director positions.

The provisions within this shareholder agreement capture issues of major concern to most shareholders, treating them fairly regardless of their ownership percentage, and aiming to clarify and streamline the decision-making process on vital issues.

Corporation Information

Enter the company's name and address exactly as it appears on your articles of incorporation filed, or to be filed, with the state.

Shareholder Information

Enter each and every shareholder's name and address, and identify whether the shareholder is an individual or business entity. This shareholders' agreement is only effective when all shareholders agree to its terms and conditions. Therefore, every shareholder is a party to this agreement. 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 on Exhibit A: Schedule of Shareholders.

Classes of Shares and Number of Shares

Enter each and every shareholder's ownership in the company by share classes and the number of shares per class. This creates a record of the company owners' ownership percentage. This information is necessary to establish voting rights and to calculate the company's value per share. The percentage breakdown will appear on 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 corporation status (C Corporation or S Corporation). For example, some particular features of an S Corporation include the following:

  • The shareholders may not be another business entity
  • The shareholders can report their taxes in personal return
  • There are limits to the number of shareholders an S Corporation may have
  • The S Corporation shares, regardless of class names, must all have the same profit- and loss-sharing terms.

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.

Proxy

A proxy, if allowable, 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, and allows the shareholders the ability to participate when they are unavailable during the time set for shareholder meetings.

Board of Directors

The shareholders can agree to fill the Board of Director positions through various methods. The most common ones are as follows:

  • Each Shareholder Appoints One Director. Each shareholder can name any competent person to be a director on the company's Board of Directors. The shareholder may appoint his or herself or a third party.
  • Each Shareholder Becomes a Director. Each shareholder automatically becomes a director within the Board of Directors. This option requires no election of appointment formality. It often enables each shareholder to become more actively involved in the management of the business.
  • By Shareholder Election. Shareholders elect the Board of Directors according to the rules and procedures in the company's bylaws. There are no special arrangements between shareholders that change the election of the company's Board of Directors.
  • Do not specify. Select this option if the shareholders do not want to include a section within their shareholders' agreement on how to fill the Board of Directors positions.
  • Other. You also have the option of creating a custom procedure for filling the Board of Directors positions in your company, such as random selection (e.g. drawing names out of a hat) or by various rounds of shareholder election with special rules.

Shareholders as Officers

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:

  • Engaging in misconduct or a willful breach of this agreement that the shareholders collectively find unacceptable or harmful;
  • Being convicted of a felony involving moral turpitude such as, but not limited to, spousal abuse, kidnapping, aggravate assault, and more;
  • Taking certain actions indicating the shareholder is insolvent and unable to pay his or her debts, such as, but not limited to, making an assignment for the benefit of creditors or filing for bankruptcy;
  • Being judicially declared insane, incompetent, or physically or mentally disabled;
  • Causing criminal claims for liabilities for the company; or
  • Engaging in other conduct constituting legal cause termination.

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.

Dividends

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:

  • If you select Yes, the company will make regular dividend distributions if during the distribution period (whether monthly, quarterly, every six months, or annually), the company's net income meets the predetermined amount that satisfies the shareholders. When choosing this option, insert the period or frequency of distribution and the minimum net income threshold during that period.
  • If you select No, the company will not make regular dividend distributions. The company may still make special dividend distributions with approval from a supermajority (2/3rds) of all shareholders.
  • If you select On occasion, the company may decide to make dividend distributions when the company's net income meets the predetermined amount that satisfies the shareholders. This gives the Managing Shareholder or the Board of Directors, a little more room to make their own business judgment on whether to issue dividends or not. When choosing this option, insert the period or frequency of distribution and the minimum net income threshold during that period.

Dissolution

The shareholders may agree by supermajority (2/3rds) 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.

Mandatory Shareholder Action

This shareholder agreement retains the right and control for shareholders to make the most important business decisions by unanimous vote as listed below:

  • Amend, repeal, or alter any provisions of the company's articles or incorporations or bylaws;
  • Merge or consolidate the company with another enterprise;
  • Issue shares, options, or other rights to acquire shares of the company; or
  • Convert the company into a different entity type.

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.

Restrictions on Transfer

As the shareholders agree they wish to have 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 and then offer the shares to existing shareholders to purchase first. If any or all of the shares available for sale are not purchased by existing, non-selling shareholders, then these remaining shares may be offered to third parties for purchase.

Share Valuation

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 a starting point for the valuation negotiation between the selling shareholder and non-selling shareholder. 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.

Special Buy-Sell Provisions

Select "Yes" if the shareholders want the following protections for minority and majority shareholders upon a sale of company shares to a third party.

  • Tag-Along Right. This is a right exercised most often by minority shareholders to require that, when a shareholder has negotiated sales terms of his or her shares to a third party, the third party must offer those same sales terms to other shareholders not originally in the deal. This right is designed to obligate the selling shareholder to consider and incorporate the minority shareholder's rights and interest in the negotiation with third parties.
  • Drag-Along Right. This right is exercised by majority shareholders to require minority shareholders to join in the 100% sale of the company to a third party, if the third party so desires. This right is designed to protect majority shareholders by making sure they can sell and transfer all their shares to the company if their target buyer is only interested in purchasing a whole company without any minority shareholder or control.

Dispute Resolution

Shareholders agree that, while there are many options to resolve disputes, often alternative dispute resolutions are much more effective at maintaining shareholder relationships and 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.

Non-Competition, Non-Solicitation and Trade Secret Protection

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.

Legend

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.

Termination and Amendment

This shareholders' agreement is entered into by all the shareholders. It can only be amended by approval of all the shareholders as well. The agreement may also be terminated by agreement 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.

Exhibit A: Schedule of Shareholders

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 if and when notice is required for any reason according to the company's shareholders' agreement and bylaws. It is the definitive record of company ownership until this agreement is terminated, replaced or updated.

Final Steps: Signing the Shareholder Signature Page

Each shareholder listed in Exhibit A must sign the Shareholder Signature Page to personally agree to the terms of the shareholders' agreement. The shareholders' 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 shareholders' agreement. This is necessary because, in certain states and under particular circumstances, the shares of a company are considered property owned jointly and equally by a shareholder and the shareholder's spouse or registered domestic partner. The spouse or registered domestic partner in those situations is therefore a company shareholder as well. Since all shareholders must agree to the shareholders' agreement for the agreement to be effective, the spouse or registered domestic partner's approval and signature is required.

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 shareholders' 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.

Business Business Formation

Shareholder Agreement

A shareholders' agreement is an arrangement between a company's shareholders that clearly defines their ownership rights and obligations. It allows the company to be easily managed and ensures shareholders are treated fairly from the get-go.

LegalNature's shareholders' agreement can easily be tailored to your company's specific needs. It includes provisions to safeguard the company owners and their dividend distribution rights, voting rights, management rights and responsibilities, and much more.

Get started now with our intuitive and easy-to-use form builder to quickly create your shareholders' agreement.

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user guide icon Help Guide

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.

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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.

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