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Having a 'shareholders agreement' is a bit like having insurance. You hope that you'll never need to use it, but its there, just in case you do. Putting one in place will ensure that you're going into business with confidence and protection.
The good news? You don't need to spend lots of your hard-earned cash drafting up a Shareholder Agreement. Read on to find out how to write one for your company now.
What is a shareholders agreement?
A shareholders agreement is a written legal document designed to protect every investor's financial stake in the corporation. It's used to define the relationship between a company's shareholders as a means of safeguarding all parties. The agreement should lay down the rules between parties and help regulate the relationship in the future.
This type of agreement usually lists:
- Information on each shareholder
- The hierarchical structure of the corporation
- Decision-making powers within the company
- Valuation of shares
- Other info that's important to the running of the business.
Download this template at Lawpath
When should I use a shareholders agreement?
You should use a shareholders agreement any time you embark upon a business arrangement with other investors or share-owning parties. Technically, a shareholders agreement can be put in place at any time, but it's always better to do it as soon as a company has more than one shareholder.
You may also need to consider writing a new shareholders agreement if there's a considerable change in the company's shareholders or structure. For example, if a shareholder wants to sell his shares or if the company changes its business model.
What does a shareholders agreement include?
A shareholders agreement can vary considerably depending on the company and the shareholders involved. There are some key items that should be covered in the agreement, which include:
- An outline of the rights and obligations of the shareholders.
- How shares will be issued and transferred. For example:
- What happens to shares upon the death of a shareholder?
- How does a shareholder sell their shares?
- How does a new party acquire shares?
- How are dividends paid?
- How minority shareholders will be protected.
- An outline of how the company will be run. For example:
- How are directors appointed and removed?
- How and when will board meetings be held?
- How is the company going to be financed?
- How will management information be shared with shareholders?
- Define how important decisions will be made and disputes resolved.
Shareholders agreement vs partnership agreement
Shareholders agreements and partnership agreements both set out the business relationship between the involved parties. The main difference between the two lies in their name. While a shareholders agreement is an agreement between the shareholders of a company, a partnership agreement refers to an agreement between partners in a partnership.
To understand this better, it's important to know the difference between a partnership and a company. Partners in a partnership come together to pursue a common business goal. All partners will be involved in the day-to-day running of the business and share in the profit or loss.
Shareholders, on the other hand, own shares in the company and can exercise influence over the company through rights to vote at shareholder meetings. Generally speaking, shareholders aren't involved in the day-to-day running of the company and liability for losses is limited.
How effective is a shareholders agreement?
Despite not being a legal requirement, a shareholders agreement is a hugely effective tool in regulating business between shareholders and managing any future disagreements. Without a shareholders agreement, disputes that arise have to be settled according to the Articles of Association.
Do I need a lawyer to send this document?
The implications of getting something wrong in a shareholders agreement can be severe, which is why it's always a good idea that a legal professional looks over or even drafts the document for you.
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How do I write a shareholders agreement?
Writing a shareholders agreement takes time. Clauses should be carefully considered to include everything that is relevant to the company and shareholders. Here's a simple how-to for when you start writing one:
1. Set out the basics
The first section of your shareholders agreement should name all of the parties involved in the agreement along with a general description of the company structure and procedural rules. For example:
- Who are the company's directors and how are they chosen?
- How often does the board of directors meet?
- What's the role of the directors in the company's governance?
2. Define the rights and responsibilities of all parties
The rights and responsibilities of each shareholder, as well as the company, should be clearly outlined. This can include things such as:
- Financial obligations
- Decisions that require unanimous approval
- Information shareholders can access
- What is acceptable and not acceptable when selling shares
- Cases in which a board's decision can be overruled by shareholders
- Dispute resolution
- How often reports will be provided to the shareholders.
3. Outline any limitations on shares
There should be a clear process outlined in the issuing and transferring of shares. It should include situations where shares can be sold and if the company can repurchase shares at any time. Tag-along rights concerning minority shareholders and drag-along rights should also be discussed here.
Where to get free legal documents and templates like a shareholders agreement
With such a complicated and important document like this one, there's every chance that you'll need a helping hand when it comes to writing it. A shareholders agreement template is a great place to start. Here's where to find some online, right now!
- Lawpath. Lawpath is an online legal resource for small businesses and entrepreneurs. Users are welcome to browse free samples on its website but must sign-up to access customisation options.
- Law Depot. Law Depot provides a huge array of free documents that you can download and edit on your computer. This includes a free shareholders agreement template.
- LegalVision. LegalVision offers users unlimited use of free legal document templates, including a shareholders agreement, and real-time legal help for a monthly membership fee of $199.
- Wonder Legal. Browse more than 140 legal document templates with Wonder Legal, all of which can be purchased for a one-time fee. You can browse a sample of a shareholders agreement on Wonder Legal, but you'll need to pay $89.99 to customise and download it.
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