Free Shareholder Agreement

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Shareholder Agreement Information

What is a Shareholder Agreement?

A Shareholder Agreement is a contract that establishes the rules that govern the shareholders’ relationship to a corporation and to one another.

A shareholder owns portions of equity, known as shares, in a corporation. Depending on how well the company performs, a share’s worth may fluctuate and a shareholder may profit or lose money. All shareholders must review and sign the Shareholder Agreement.

How do I draft a Shareholder Agreement?

The information you’ll need to complete a Shareholder Agreement includes:

  • Corporation and shareholder information: Names and addresses
  • Share ownership details: The type and number of shares each shareholder owns, and what happens when a shareholder dies
  • Additional share details: If shareholders are restricted from transferring shares and how to set the value of shares
  • Corporate management: Which areas shareholders maintain control over, including business operations, finances, capital, assets, and share issues
  • Contract duration: When the agreement begins and ends
  • Capital requirements: How to allocate additional funds when needed
  • Dispute resolution: Whether to include clauses that address conflict of interest or disputes

LawDepot’s Shareholder Agreement template makes drafting a contract easy. Our questionnaire asks whether you’d like to address certain issues, and, if so, our template automatically adds clauses to suit your needs. We also offer detailed explanations of certain clauses as you go through the questionnaire.

What are standard clauses in a Shareholder Agreement?

In a Shareholder Agreement, you may add standard clauses, such as:

  • List of reserved matters
  • Conflict of interest clauses
  • Dispute resolution clauses
List of reserved matters

Reserved matters are business decisions that require a special level of approval. Instead of the board of directors having final say, shareholders can reserve the power to decide matters regarding:

  • Business and finance: Select an auditor and bank for the corporation, restrict the corporation to a specific type of business, and/or prevent the business from providing financial assistance to individuals.
  • Capital and assets: Limit capital expenditures, limit asset disposals, and/or prevent the corporation from granting security interests or encumbering corporate property.
  • Shares and new share issues: Prevent share issues for non-monetary consideration, and/or prevent the corporation from issuing or redeeming shares except as outlined in the Shareholder Agreement.
Conflict of interest clauses

Prevent shareholders from gaining an unfair competitive advantage after leaving the company by including conflict of interest clauses:

  • Non-compete: Restrict shareholders from working with the company’s competition for a set time after the shareholder leaves the company.
  • Non-solicitation: Restrict shareholders from enticing employees away from the company for a set time after the shareholder leaves the company.
Dispute resolution clauses

Prepare for potential conflicts between shareholders by including dispute resolution clauses relating to:

  • Mediation and arbitration: If shareholders cannot negotiate a resolution, they may bring in a third party such as a mediator to help them reach a decision or an arbitrator to decide for them.
  • The shotgun provision: A shareholder may offer to buy or sell their shares at a certain price. This provision favours shareholders with strong finances and abilities to run the company alone.
  • A right of first refusal: When a shareholder wants to sell their shares, they must first make an offer to existing shareholders on a pro-rata (proportional) basis.
  • Tag-along rights: Also known as “piggy-back” rights, this provision protects minority shareholders during a third-party buyout. If a majority shareholder sells shares to a third party, the minority shareholders have the right to become part of the same transaction.

What’s the difference between a Shareholder Agreement and Articles of Association?

Although these two documents both address a company’s internal rules, they have many differences. For instance, a company may keep its Shareholder Agreement private, but its Articles of Association are automatically available to the public once filed with Companies House. Further, under the Companies Act 2006, UK law requires companies to create Articles of Association during the incorporation process. Conversely, UK law doesn’t require all companies to create a Shareholder Agreement.

The Shareholder Agreement mainly outlines the relationship between shareholders and their corporation. In contrast, the Articles of Association outline:

  • Members’ liability
  • Directors’ rights and responsibilities
  • Decision-making processes
  • Shares, dividends, and other distributions
  • Administration arrangements
  • Indemnity and insurance

If you’re creating both documents, be sure that your Shareholder Agreement aligns with the rules set out in your company’s Articles of Association. This way, you won’t have conflicting rules that cause you to question which document should override the other.

What happens without a Shareholder Agreement?

Without a formal agreement that provides plans for conflict resolution, shareholders might have a difficult time resolving disputes. For instance, our Shareholder Agreement allows shareholders to agree to use a mediator or arbitrator to help them resolve conflicts if and when they occur. A Shareholder Agreement also creates a record of the parties’ agreement to their obligations which can help during conflict resolution.

By creating a Shareholder Agreement during the incorporation process, parties can minimize future uncertainties.

What are the consequences of a breach of the Shareholder Agreement?

If a shareholder breaches the contract, the other parties have the option to mediate, arbitrate, or litigate (i.e., find a resolution with the help of a third-party or settle a claim in court). A Shareholder Agreement is a legally binding document, which means that the parties have a contractual obligation to uphold its terms and conditions.

Who can witness a Shareholder Agreement?

If needed, you can get a witness or a notary public to sign and authenticate your Shareholder Agreement. However, laws don’t require you to do so.

If you suspect that one or more shareholders may deny having seen or signed the contract, a witness’s signature or notary seal will help prove the document’s validity in a court setting.

Related documents

  • Share Purchase Agreement: Sell stocks or shares from an existing shareholder of a corporation to another individual or corporation.
  • Joint Venture Agreement: Set up a business agreement between two or more parties. Combine resources for a limited time to complete a project or achieve a goal.
  • Articles of Association: Outline the internal management rules of a company, including shareholder meetings, voting requirements, and the responsibilities of officers.
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