As readers of this blog know, we have addressed shareholder agreement. Indeed, in a prior post, we spoke about how the breach of a shareholder agreement is one of the most common reasons for shareholder disputes. However, this has led many of our readers to seek out additional information on shareholder agreements.
Shareholder agreement defined
A shareholder agreement is also known as a shareholders’ agreement or stockholder (stockholders’) agreement. These documents define how the company will operate, including the rights and obligations of shareholders/stockholders and the management company, if a separate management company is to be formed or utilized. This dated document will also include the number of shares issued and to whom, the costs of those shares, any transfer restrictions and pre-emptive rights.
The shareholder agreement’s purpose is to ensure that the shareholders’ rights are protected and treated fairly. This is why it includes how shares are priced and how shareholders can exercise their rights, including safeguards for minority shareholders.
Optional, but needed, document
Many companies think that their bylaws will serve this function, but that’s not true. The bylaws and articles of incorporation are the legal basis of the organization. The optional, shareholder agreement is specifically for the shareholders and is especially helpful for corporations with very few shareholders. And, while these shareholder rights and responsibilities can be included in the bylaws, it is always a good idea to have a separate shareholder agreement that is purely focused on the shareholders.
Business litigation still possible
This is why we always recommend drafting a comprehensive and detailed shareholder agreement to all of our Maumee and greater Toledo metro area (Northwest Ohio) clients. After all, as we said in our prior post, it is the first step to avoid shareholder disputes. Though, even when one drafts a comprehensive and detailed shareholder agreement, business litigation can still happen.