What is a Shareholder Agreement?

A shareholders’ agreement is an arrangement among a company’s shareholders regarding certain rights and obligations of the company’s shareholders.

A shareholders’ agreement also includes information on the management of the company and privileges and protection of shareholders.  The shareholders’ agreement is intended to make sure that shareholders are treated fairly and that their rights are protected.

A shareholders’ agreement usually includes sections providing for the fair and legitimate pricing of shares when sold to third parties, or purchased by the company or other shareholders.  It usually contains provisions for shareholders to decide whether outside parties may become future shareholders and establishes safeguards for minority positions.

A shareholders’ agreement includes a date, often the number of shares issued, a capitalization (or “cap”) table, outlining shareholders and their percentage of company ownership, any restrictions on transferring shares, pre-emptive rights for current shareholders to purchase shares (in the event of a new issue to maintain their percentage of ownership), and details on payments in the event of a company sale.

Shareholder agreements differ from company bylaws.  Bylaws are mandatory and outline the governing of the company’s operations; conversely, a shareholder agreement usually focuses on shareholders, particularly where they obtain additional or more detailed rights and obligations.   A shareholders’ agreement may be most useful when a corporation has a small number of active shareholders that can more easily negotiate changes to, or details for, their rights and obligations.

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Sources: https://www.investopedia.com/

https://www.informdirect.co.uk/Wikipedia