Key Elements of a Shareholder Agreement

While businesses exist as collective entities, many companies are fundamentally composed of a group of shareholders. A shareholder is a person, company, or institution that owns at least one share of a company’s stock. In order to smoothly operate any company, there needs to be harmony. Like any successful composition, all parties must understand their roles and perform accordingly. These relationships, roles, responsibilities, and rights are clearly articulated within a shareholder agreement. Shareholder agreements also include the rights and protections offered to the shareholders and information about the company’s management.

These documents are intended to protect shareholders and ensure that they are treated fairly. Shareholder agreements discuss an equitable price for the shares if or when they’re sold. They also allow shareholders to decide what potential partners can do, and protect the rights of minority shareholders in the company.

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What’s Included in a Shareholder Agreement?

A shareholder agreement establishes a fair relationship between the parties and spells out the terms and conditions for shareholders to purchase company stock.

Common elements of shareholder agreement include:

The number of shares issued
The percentage of ownership for the company and shareholders, respectively
A capitalization table
The existing shareholders’ rights to purchase shares
Restrictions on the exchange of shares

Other Key Elements of Shareholder Agreements

In addition to the common contractual elements, a shareholder agreement may have other stipulations.

Another vital component of a shareholder agreement is the share subscription clause. The shareholder (also called a subscriber) agrees to pay installments at a fixed price. Each installment is exchanged for a certain number of shares in the company.

The subscription agreement includes the number of shares issued to the subscriber and the timing of each installment.

A shareholder (or stakeholder) agreement also outlines how shares are sold or transferred.It outlines resolutions for potential disagreements regarding the disposal of shares. For example, some company bylaws may stipulate a right of first refusal, which allows other shareholders to purchase shares before a stakeholder sells them to an outside party.

Shareholder Behavior

Shareholders directly impact the operation of the company by nominating, appointing, or recommending the hiring of senior management staff. Oftentimes, these are C-level executives with “C” meaning chief as in chief executive officer (CEO), or chief financial officer (CFO).

They also impact operations by holding leaders accountable for the company’s financial performance. This way, they can ensure that the company meets projected revenue and profit forecasts.

Minority shareholders who own a certain percentage of the company’s stock can also nominate members to the board of directors. For example, a shareholder who has 10% of the company’s shares, per the company’s bylaws, has the right to nominate a director to represent their minority interests.

Veto Power

Minority shareholders often have little say in the company’s operations if the majority outvotes them. Veto power in shareholder agreements creates equal rights among shareholders and grants minority shareholders greater influence in fundamental decisions for the company.

This section of the agreement lists the kinds of company business that can’t be carried out without the consent of protected minority shareholders.

Deadlock Clause

If a company has two shareholders with 50% of the company each, the shareholder agreement may include a deadlock clause. This clause details how to handle a situation in which both parties disagree on a critical course of action.

Non-Compete Clauses

Non-compete clauses prohibit shareholders from interfering with the company as long as they hold stock in it. They reduce rivalries with company customers, vendors, and employees.

Developing a suitable shareholder agreement for your business is vital for having a successful publicly-traded company.

At Woods Lonergan, our New York City business lawyers can draw up a shareholder agreement that protects you, your shareholders, and your business partners. We can also help you with amendments and addendums if your contract needs to be modified thereafter. Reach out to our team today.

About the Author

James F. Woods is Founder and Managing Partner of Woods Lonergan. He has tried more than 60 jury cases to verdict as first-chair trial counsel, beginning his career as a prosecutor, and resolves complex commercial and real estate disputes valued at $1M to $100M+ for business owners, principals, and middle-market enterprises across the New York metro area. He appears regularly in the New York Commercial Division and in the federal district courts for the Southern and Eastern Districts of New York, and has argued appeals in the Appellate Division and the Second Circuit.

His practice covers complex commercial litigation, real estate and asset litigation, partnership and shareholder disputes, fiduciary breach and corporate fraud, and cooperative and condominium governance. He counsels corporate and cooperative boards throughout New York.

The Legal 500 United States ranks James in its New York Elite rankings for Commercial Disputes, and his peers have recognized him with Martindale-Hubbell's AV Preeminent rating. Woods Lonergan is ranked in Chambers USA: Spotlight New York for Litigation: General Commercial and Real Estate. James serves on the Commercial & Business Litigation Committee and the Business Torts & Unfair Competition Committee of the American Bar Association Section of Litigation, and on the Cooperative & Condominium Law Committee of the New York City Bar Association. His commentary on New York commercial and real estate disputes has been quoted in The New York Times, The Washington Post, Bloomberg Law, Law360, and Forbes.