What Is a Shareholder?
A shareholder can be a person, a company, or another institution that has ownership of at least one single share in a company. As shareholders are the corporation's owners, benefits can be made if the company is successful when stock has gained in value. If a company performs badly, however, a shareholder could lose money if the stock price declines. Fortunately for most corporate shareholders, compared to partnerships or sole proprietorships, they are not liable personally for the corporation's debts and any other obligations of a financial nature that may arise. This means typically, if the corporation goes under, any creditors are not permitted to ask shareholders to pay anything, but they can in the case of a privately held entity where the owner may be asked to pay the debts.
Shareholders do have the right to ask to inspect the corporation’s records and books and are even in the position to sue their corporation for any misdeeds on the part of its directors and other officers. Common shareholders can vote on important corporate matters, like who is on the board of directors and if a proposed merger is allowed to take place. What is very important is, if a corporation has to liquidate its assets due to dissolution or bankruptcy, the shareholders can take a proportionate amount of the proceeds. In some cases, bondholders, creditors, and preferred shareholders are accorded priority in front of common shareholders in the situation of liquidation. Shareholders also have the right to take a part of any dividends that the corporation declares.
What Is a Shareholder Agreement?
As the name suggests, a shareholder agreement is typically an agreement drawn up between some or all of a corporation’s shareholders. It is an arrangement whereby a company's shareholders describe the way in which the company has to be operated along with the rights and obligations of the shareholders. Included also is any information concerning regulations about the management of the company, the shareholders' relationship, the ownership of shares, and the protection and privileges of shareholders.
Overall, the shareholder agreement’s intention is to ensure that all the rights of the shareholders are protected and they are treated fairly at all times. It also gives shareholders the right to make decisions in relation to those outside parties who may wish to become shareholders in the future and offers safeguards for those who are minority shareholders. Including minority shareholders’ rights is not a compulsory part of a shareholder agreement, but it can be included.
Two or more shareholders can draw up an agreement presented in writing as long as the shareholders exercise the voting rights they have in relation to their shares as laid down in the agreement. An example of the use of an agreement could be when two or more minority shareholders of the corporation come to an agreement to vote together on director appointments so that their voting power as a collective is stronger than if they voted individually.
In private corporations that have multiple shareholders, the shareholders of such corporations will usually agree, in writing, to a shareholder agreement. Any written agreement drawn up by all the corporation’s shareholders may add restrictions to some extent as to the directors’ powers to supervise or manage the business and the corporation’s affairs.
What Normally Happens Following the Approval of the Articles of Incorporation?
In many situations, once a corporation has filed its articles of incorporation, it is by default managed completely by the shareholder-elected directors and by the officers who have been appointed by the director(s) and are consequently supervised by them. Typically, what is called a shareholder agreement permits the corporation’s shareholders to alter that default and the shareholders are given the power to supervise and manage the corporation to the degree that has been reached in the agreement. The agreement could permit shareholder consent to make alterations to the corporation’s constating documents, any allotment or issuance of shares, the sale or purchase of real property, and any decisions that are normally left to the corporation’s directors where there is no unanimous shareholder agreement present.
As well as restricting the corporation’s directors’ powers or laying out how shareholders may vote, there are other crucial issues that can be addressed in a shareholder agreement, as follows:
- The method for paying out shareholders’ loans
- The way shares will be handled if a shareholder dies, faces insolvency, or is confronted with a marital breakdown
- Provisions for handling the sale or purchase of shares owned by a shareholder, i.e. rights of first refusal, forced sale, or any specific requirements when a sale takes place to someone who is not a current shareholder
- Assigning a dispute resolution method for resolving shareholder disputes
- Provisions which limit the right of a shareholder to compete with its corporation or solicit any clients or any employees from within the corporation
Basic Provisions Contained in a Shareholder Agreement
The following provisions are typically included in a shareholder agreement:
- Regulating ownership as well as the voting rights of company shares, which include provisions for lock-down, share transfer restrictions, security interests, grants over shares, rights of first refusal for shares that have been released by the corporation, drag-along and tag-along rights, and rights for the protection of those who are minority shareholders
- Management and control, which includes the power to nominate a person to be elected on the board of directors and enforcing super-majority voting for important matters
- Provisions for the resolution of disputes that may occur in the future between shareholders, including deadlock provisions
- The amount and nature of initial contributions
- How contributions in the future should be made
- The law that governs and covers the shareholder agreement
- Environmental and ethical practices
- Designation of key roles and responsibilities
One thing that should be emphasized is the ease with which a shareholder agreement can be formed and amended, unlike bylaws and articles of incorporation documents. One of its drawbacks, though, is there is sometimes a conflict between it and the corporation’s articles of incorporation and bylaws documents. It can sometimes be used as proof of monopolistic practices and a conspiracy.
General Shareholder Rights
One of the most important things as far as shareholders are concerned is that they have the right to get a percentage of any dividends that the corporation has declared. They can also ask to look over the company’s books and important records. If they believe the directors or any other of the corporation’s officers are responsible for any misdeeds, they do have the right to sue. Most importantly, if the company moves into liquidation, the value of any assets that are sold due to a bankruptcy or dissolution should be shared amongst the shareholders depending on how many shares they owned. However, if money is owed to any creditors, they get paid off first.