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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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Checklist

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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Help Guide

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:

  • 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 of all shareholders; or
  • agreeing that certain shareholders will hold particular officer or board of director positions.

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.

Corporation Information

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.

Shareholder Information

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.

Classes of Shares and Number of Shares

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:

  • No shareholder may be a business entity
  • The shareholders can report their taxes on a personal tax return
  • There are limits to the number of shareholders an S corporation may have
  • The S corporation shares, regardless of class types, must all have the same profit-sharing 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 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.

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 also 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. This is an option if the shareholders do not want to include a section within their shareholder 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.

Managing Shareholder and Limits to Authority

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:

  • enter into any significant or extraordinary contracts out of the ordinary course of the company's business;
  • enter into any contracts or commitments lasting longer than one year in duration;
  • issue shares or sell any additional company shares;
  • sell all or substantially all of the company's assets;
  • approve any fringe benefit arrangements that do not treat each shareholder proportionally and fairly;
  • guarantee the company will repay a third party's debt; and
  • take any action the shareholders agree need additional approval.

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].'"

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, aggravated 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
  • 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 choose to make regular distributions, the company will distribute dividends if, during the distribution period (whether monthly, quarterly, every six months, or annually), the company's net income meets a 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 choose not to make regular distributions, then the company may still make special dividend distributions whenever it so chooses with approval from a supermajority (two-thirds) of all shareholders.
  • If you select "On occasion," the company may decide to make dividend distributions when the company's net income meets a 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 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 for shareholders the right 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 incorporation or bylaws
  • Merge or consolidate the company with another enterprise
  • Issue shares, options, or other rights to acquire shares of the company
  • 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

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

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.

Special Buy-Sell Provisions

You may choose to include 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 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.

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 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.

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 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.

Final Steps: Signing the Shareholder Signature Page

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.

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Checklist

Step 1: Gather Information

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.

Step 2: Answer Key Questions

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.

Step 3: Review and Sign

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.

Step 4: Distribute and Store Copies

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.

Step 5: Periodically Review and Update

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.

Step 6: Complete Related Documents

Completing documents such as corporate bylaws and meeting minutes will offer additional protection, as both are required for corporations in most states.