What is a shareholders Agreement? and what are the benefits of having one?

A shareholders’ agreement, also called a stockholders’ agreement, is an arrangement among a company’s shareholders that describes how the company should be operated and outlines shareholders’ rights and obligations. The 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. The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides 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.

There are many advantages to entering into a shareholders’ agreement, including:

• Protecting the position of minority shareholders by requiring unanimous approval for important company decisions.
• Regulating the appointment and removal of directors by allowing a shareholder or a group of shareholders each to appoint one or more directors.
• Regulating the raising of capital to avoid the dilution of shareholdings.
•  Placing restrictions on changes to the nature of the company’s business.
• Providing for the resolution of disputes where a deadlock occurs, through mediation and/or arbitration.

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