A shareholder agreement is an essential document for companies that have more than one owner. Among other benefits, it can provide rules for dispute resolution and the handling of specific business situations. It also spells out shareholders’ rights and responsibilities.
In a small company, most voting shares belong to a small group of individuals, so a shareholder agreement can also protect minority shareholders’ interests.
Decision making
Most decisions typically require only a simple majority, while others may require a two-thirds vote or “supermajority.” Specific initiatives might require a unanimous vote. Formalizing the decision-making process can go a long way toward keeping the peace between the owners.
Transfer of ownership
Minority shareholders could have to sell their shares upon leaving the company. If so, the shareholder agreement specifies who may purchase them and at what price. If one of the majority shareholders dies, can their spouse or child inherit the shares? Business partners should be sure to address this situation in advance, so there are no unwelcome surprises.
Exit strategy
The exit clause in a shareholder agreement specifies what will happen if one or all shareholders want to sell their shares. A majority shareholder may decide to exit the company, or the majority may wish to sell the company, in which case they may want to re-acquire the minority shares.
There are many other critical clauses as well. Among them are deadlock resolution, non-competition and appointing the board of directors. A well-crafted shareholder agreement can minimize disputes and promote equitable business practices.
