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Understanding the Elements of a Shareholder Agreement

Establishing a business requires many important documents. A shareholder agreement may be one of those.

Shareholder agreements are not one-size-fits-all. Instead, they’re tailored to satisfy a company’s unique needs. 

A business law attorney in New York can help you create a strong shareholder agreement for your company. Woods Lonergan is ready to help.

What is a shareholder agreement?

A shareholder agreement is a contract that details the relationship between shareholders and the corporation. This agreement includes provisions for how the company should be operated. It also describes what rights, obligations, protections, and privileges shareholders have. 

This type of arrangement helps ensure that shareholders are treated fairly and that their rights remain protected. Additionally, the agreement gives shareholders some power to make decisions regarding potential future shareholders. 

Elements to Include in a Shareholder Agreement

Shareholder agreements will vary from corporation to corporation. There are various provisions to include. Some of the basics are as follows. 

Preamble

The preamble goes at the very beginning of the agreement. It provides the names of shareholders and the company name.

Recitals

The recitals portion lists out the reason for the agreement and the intended goals.

Selling and Transferring Stocks

At some point, a shareholder may want to sell or transfer their stocks. The agreement can provide details and rules for how a shareholder can do so. 

The shareholder agreement aims to protect the shares of the company by restricting sales and transfers. This provision can include information regarding how shares are handled if a shareholder passes away or divorces. It can also include restrictions to prevent outside individuals from becoming shareholders. 

Rights and Responsibilities of Shareholders

Shareholders own part of the business and therefore have rights. The contract details these rights.

Additionally, by entering the agreement, shareholders understand being a shareholder comes with responsibilities. The agreement determines each shareholder’s commitments. To remain a shareholder, they must fulfill their obligations. 

Minority vs. Majority Shareholders

Minority shareholders do not have the same rights as majority shareholders. The majority shareholders have more rights, as these shareholders are typically individuals of high power and authority within the company. 

A shareholder agreement should distinguish between the rights of minority shareholders and majority shareholders. 

Voting Rights

The shareholder agreement can include provisions for shareholders’ voting rights.

The contract can also determine how many votes are needed to make important company decisions. Some types of decisions may require fewer votes, while others require a higher percentage of the majority vote. 

Right of First Refusal Clause

The right of first refusal clause allows the company and other shareholders a chance to buy shares that are being sold. 

Typically, a shareholder has a third-party willing to buy some or all of their shares. Before committing to this sale, they must offer to sell their shares to the company. 

Noncompete Clause

It’s common for shareholder agreements to have noncompete clauses. These clauses may restrict a shareholder from engaging in conflicting activities during their time as a shareholder. In some cases, this restriction continues for some time after they are no longer a shareholder. 

Dispute Resolution

Disputes often arise. The dispute resolution clause can help the parties decide how to seek resolution, such as through the following methods:

  • Mediation
  • Arbitration
  • Negotiation

Legal action is also an option, but most companies try to avoid it as it can be costly and time-consuming. 

Deadlock Resolution Clause

A deadlock arises when shareholders cannot agree on a particular issue. There are various ways to handle a deadlock, including mediation. If a deadlock occurs at any time, this provision can provide guidance. 

These are only some of the important clauses your shareholder agreement can include. A business law attorney can get to know your company’s needs to create the ideal shareholder agreement.

Consult with a Knowledgeable New York Business Law Attorney

Since 1993, Woods Lonergan has been helping New York clients with their business needs. We use our knowledge, background, and skills to understand your business goals and help you achieve them. Our dedication to our clients has earned us an outstanding reputation within the community. 

If you need help creating a shareholder agreement for your business, contact us to schedule a meeting with one of our attorneys today.