What Is The Purpose Of A Shareholders Agreement

A shareholder`s agreement can work in the same way as a pre-marital agreement in a marriage. It can avoid a great deal of uncertainty when entering into a relationship and minimize the problems that arise when partners disintegrate. These are just some of the reasons why a shareholder contract is important and useful for a company to be in its arsenal and protect individual shareholders. Each agreement should be reviewed on a regular basis to ensure that it continues to operate as the company and shareholders wish, and be updated and re-evaluated when shareholders come and go. Over time, the personal circumstances of each shareholder can change significantly. This can have a huge impact on the transaction in the absence of a shareholders` pact. For example, the shares of a capital company are considered assets, so that after the death of a shareholder, the deceased`s shares become part of their estate and are subject to the will of the deceased. In other words, in the absence of a shareholder pact dealing with a shareholder`s shares after the death, the spouse or children of the deceased could, overnight, become your new business partner – a scenario that may not be desirable for other shareholders. A mandatory repurchase provision may be included in the shareholder contract, which provides that if a shareholder dies, the other shareholders or the company are forced to purchase the shares of the deceased and the executor or manager of the estate is required to sell the shares. In addition to the repurchase provision, a share valuation mechanism can be agreed and included at the time of the shareholder`s death. There are several sections that are included in a shareholder pact, although they may vary slightly from company to company. Shareholder agreements vary considerably from country to country and industry to industry.

However, in a typical joint venture or start-up, a shareholders` pact is normally expected to resolve the following issues: any company that has shareholders needs a shareholders` pact. Even if your business is private (no shares sold to the public) and is closely linked to a small number of shareholders, it is important to have an agreement. Small private companies often use these agreements more than large state-owned enterprises. A shareholder pact can determine the minimum and maximum number of directors. It can also explain how directors are appointed. Other clauses may also be included, such as a drag-along and piggy bank clause which, in the first case, requires minority shareholders to sell their shares if a majority shareholder wishes to sell all of their shares to a third party or, in the latter case, gives minority shareholders the opportunity to sell their shares with the majority shareholder.