Published May 28, 2007

Shareholder Agreement: Sample Outline of a Shareholder Agreement

Essentials Of A Shareholder Agreement

If your business is a corporation that issues shares, then you need to have a shareholder's agreement, for everyone's protection. A good shareholder agreement should contain the following:

For the Directors or Stakeholders

Share Distribution: It will include the rights related to the issuance, sale, or subsequent distribution of shares. It will also have the pre-emptive rights and first refusal rights of the directors and management.

Duties and Rights of the Management and the Employees: This is the legal foundation of the personnel aspect of the business and will ensure that the business is not run in an autocratic manner.

Transfer of Shares: With the passage of time, directors and management may want to divest their shares. The shareholder's agreement should contain guidelines and options for the selling and buying of shares, so that the overall share distribution ratio is not disturbed.

Guidelines for Exigencies: This will include contingencies for the retirement or the death of a stakeholder or Director. These guidelines will ensure that there is minimum confusion as and when an emergency should occur. It will ensure business continuity and safeguard the interest of the shareholders.

Composition of the Board of Directors: This is a legal requirement that clearly identifies members of the Board of Directors and their terms of employment or continuity. It will also describe the duties of the board.

Compensation: Members of the Board of Directors are normally not employees of the company. Therefore, they need to be compensated for their effort in formulating policies and overseeing the management of the company.

Conditions for Change in Composition: This section will lay down the conditions under which the Board of Directors may bring in a new stakeholder, or existing stakeholders may transfer/sell their shares so as to reconstitute the Board of Directors.

Exit Clauses: A shareholder or stakeholder may choose at any time or for any reason to divest his share or stake. The shareholders agreement should lay down the conditions he needs to fulfill at this time. This will help to ensure that the directors and management continue to maintain control of the company and it will also ensure that the overall shareholding pattern of the company does not change without the express agreement of the directors.

For Shareholders

Structure of the Company: This will inform shareholders of the persons who are running the organization and managing their money.

Rights and Duties of the Shareholders: It informs the shareholders of how much they can or cannot participate in the running of the company or how much they can control the management of the money they have invested.

Distinction in the Ownership of the Shares: This section helps distinguish between the different classes of shareholders.

Vesting Rights: Conditions under which a shareholder can sell his shares.

Quorum: Lays down the number of shareholders that needs to be present to hold a shareholder's meeting and to pass a resolution.

Ownership in Case of Buyouts: Lays down the number of shareholders that needs to be present to hold a shareholder's meeting and to pass a resolution.

Dispute Settlement Machinery: This section will spell out the methods of arbitration that would be used to settle a shareholders dispute.

Voting Rights: This section will outline the voting rights on management decisions of the shareholders, thereby indicating what control the shareholders will have over the management of the money they have invested.

A well-drafted Shareholder's Agreement will help run the company and will play an important role in the continuity of the organization, and expensive and time- consuming legal wrangles can be avoided. It will provide details of the rights and duties of the stakeholders and the shareholders. A Shareholders Agreement should be reviewed and revised periodically to ensure that it is in line with the current business environment, but it should not be revised to often so as to cause instability.