A shareholder agreement is a document used to establish the guidelines that will govern the workings of a company and the relationship between the company shareholders.
Helping your incorporated clients understand the importance of the shareholder agreement can go a long way in further cementing your relationship as the business grows.
A shareholder agreement generally targets one or more of the following goals:
Buy-sell provision
A buy-sell provision is often the main reason why a shareholder agreement is prepared. Is there a catch-22 situation that is impossible to resolve between shareholders? A Forced Sale (Shotgun) Clause can be included in order to force one shareholder to sell his shares to the unhappy shareholder, or to buy the shares of the unhappy shareholder, at a price set by the unhappy shareholder and upon conditions defined in the agreement.
Right of First Refusal
An association between two or more people who want to launch a business is usually built on confidence. Having said that, what would happen, for example, if a shareholder wanted to sell his shares to a third party? Can he do it without consent of other shareholders? To avoid this type of situation, it would be wise to include a Right of First Refusal Clause in the Shareholder Agreement, thus ensuring that the shares will be offered to the existing shareholder before being sold to a third party.
Right to participate in a share sale
How can a minority shareholder protect themselves if a majority shareholder receives an attractive offer to purchase their shares? Who in such a situation would want to be submitted to the will of a majority shareholder that he or she doesn’t know? To cover this situation, a Resale Right Clause could be included in the Shareholder Agreement in order to force the purchaser to buy all of the company shares under the same conditions that govern the purchase of the shares of the majority shareholder.
Withdrawing from the business
Lastly, it is highly recommended that a Mandatory Offer Clause be included in the Shareholder Agreement. A Mandatory Offer occurs when a situation arises that requires a shareholder to withdraw from the company even if unwilling to sell his shares.
What does withdrawing from the business entail? This is a broad concept that takes into account many situations, such as:
