What Is Included In A Typical Shareholders’ Agreement?
When someone buys shares in, say Microsoft, or Amazon, or Costco, or any number of larger companies, shareholder agreements aren’t really vital—after all, you’re probably buying the shares largely to make money, and your involvement in the company will be limited to choosing how long you keep the stock you purchased.
But in a smaller to midsized company, a shareholder agreement becomes much more important. You actually may have some interest in how the business runs—and unlike a major company, you may not know as much about who is running the company, and thus, who you are trusting your money in the form of the value of the stock you purchased, with.
Basic Shareholder Rights
A shareholder agreement normally will spell out your rights as a shareholder in the company. It will, of course, say how much you are paying for the stock—but it also may include whether you are making an “in kind payment,” for example, providing services to the company for free or reduced rates, as your “payment” for your shares.
Sometimes, there are different classes of shareholder, with differing rights depending on how much the shareholder pays, or how many shares were bought. The shareholders agreement will include this information as well.
Shareholders’ Rights as to Each Other
In some smaller companies, shareholders are active participants—they may actually come to work, and perform work for the company on a daily basis. But in other companies, shareholders may simply be silent—nothing more than passive investors. The shareholder agreement spells out what a shareholder’s rights and obligations to the company actually are. .
There is a delicate balance between a company’s board of directors, and its shareholders, and you want to make sure the roles of both don’t conflict.
Shareholders and the Board
Shareholders can also be board members, and often do serve in that capacity in smaller companies, but their rights in both are independent; that is, someone may cease being a board member, but that doesn’t mean they lose their stock interest.
If the interest in both is separate, the shareholders’ agreement will detail what rights the shareholders have to demand information, action or accountability from the board of directors.
The shareholders’ agreement also will detail what items or categories of corporate decisions that the shareholders will vote on, as well as voting procedures, such as whether shareholders can vote remotely.
Selling or Transferring Shares
The shareholders may also limit or restrict how shares can be sold—many companies may want to strictly control who is a shareholder, and thus may limit how stock can be transferred. Many agreements will allow the company to buy back the shares, in the event that shares are transferred involuntarily, such as through a divorce investment or a bankruptcy by a shareholder.
Some shareholders agreements may include things you may see in employment contracts as well, such as no compete clauses, or nondisclosure agreements, that are intended to protect the company and its secrets.
Call the West Palm Beach commercial litigation attorneys at Pike & Lustig today for help with your business agreements.