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Formally Identify Your Shareholders With A Shareholder Agreement

Aug 17, 2007
A shareholder agreement is a document that each and every company having more than one shareholder must have. The agreement will be made on a specified date including the name of the corporation, its legal entity status and the names of all of its shareholders of record. Shareholders may constitute the majority of the corporation's key executive officers whose main interest lies in furthering the prosperity of the corporation through efficient and effective management.

The shareholder agreement sets forth the covenants and promises which the signatories to the agreement are agreed to, and are as follows:

Selling of shares which shall happen on the purchase date as agreed to in the agreement or in the event of any of the following instances:
i. Death of a shareholder
ii. Disqualification of a shareholder
iii. Permanent disability or incapacity of the shareholder which makes him unfit to practice.
iv. In case the shareholder ceases to be employed by the corporation.

Transfer of shares: The shareholder may not transfer, exchange, give or sell any shares except as agreed to in the agreement

How the sale of shares is to be effected: The shareholder selling shares shall do so only in pursuant of the terms of the agreement.

Death of a shareholder and method of payment: The agreement shall set forth the exact method of payment to the shareholder in the event of their death.

In the instance other than death of a shareholder: The terms of payment to the shareholder in case of an event occurring that does not include death shall be specified in the shareholder agreement.

Indebtedness of the corporation to the shareholder: The shareholder agreement shall be specific regarding any debts incurred on shares purchased by the corporation from the shareholder.

Company has the right of first refusal: In the event that the shareholder wants to dispose off his stock, the corporation has the right to be first offered the stock.

Payment terms: The terms of payment by the corporation for the stock shall be in strict accordance to the terms and conditions as set down in the shareholders agreement.

Purchase price: The shareholder agreement shall specify the purchase price for stock being sold.

Purchase date: In the event of the death of a shareholder, the purchase date of the deceased shareholders stock shall be set forth in the agreement.

As is self evident, the shareholders agreement holds the rules which govern the ownership of the company and generally includes the following terms: Is the basis of resolving all disputes, acknowledges the rights and powers of the shareholders in the corporation, and lays down the procedures as well as limits of how the company shall operate

Having a shareholder agreement prevents harmful effects from occurring when the circumstances of individual shareholders change and the corporation gets affected adversely. The shareholder agreement also acts as a preventive force to all parties involved in owning the corporation against actions taken by some of the other shareholders.

In other words, through use of common sense and rational thought this type of agreement encourages reasonable resolution of conflicts among shareholders. Starting a new company may be easy but this agreement sets out the guidelines that takes the long term perspective into consideration and thus confirms the responsibilities of the individual shareholders.
About the Author
Wade Anderson is a CPA and operates DigitalWorkTools.com

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