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The Features And Importance Of Shareholder Agreements

Aug 17, 2007
A shareholder agreement is an understanding between shareholders and a corporation, under the law, about various aspects ranging from the shareholder duties to rights, in relation to the company. The shareholder agreement is the basis of company inception and paves the way for its future course. It lays down the guidelines about the duties and the powers of the board of directors and the management.

Essentials Of A Shareholder Agreement
Experts consider the following points and clauses to be prudent when constructing the constitution of a shareholder agreement. These points and clauses also point out the reasons for having shareholder agreements.

1.Introduce the rights related to the issuance, sale, or subsequent distribution of shares, including pre-emptive rights and first refusal.

2.Define the duties and rights of the management and the employees.

3.Write the guidelines and the options for the selling and the buying of shares.

4.Construct the guidelines of conduct in the case of any exigencies, such as the retirement or the death of a shareholder. These guidelines should set out what affects the exigencies have on the corporation and the other shareholders.

5.Decide the duties or composition of the board of directors.

6.Decide on the rights of the current and future shareholders.

7.Chalk out exit clauses or mechanisms

Vital Points For Shareholders
Draft the shareholder agreement carefully to minimize future speculation and possibility of any legal entanglement. A carefully written shareholder agreement helps the functioning and the transition of events in a corporation. A foolproof agreement needs to concentrate on the following aspects as well.

1.The structure of the company.

2.The roles of the shareholders.

3.Distinctions in the ownership of the shares.

4.Clearly mentioned vesting provisions.

5.Provision or lack of provision regarding the Stock Pledge.

6.Demarcating of the quorum (the minimum strength of the participants in a meeting to pass a resolution.)

7.Procedures of handling ownership issues in case of buyouts.

8.Methodology of dispute settlement.

9.Voting rights.

10.Issues related to compensation and remuneration.

11.The appointment of professional advisors.

These stated points and issues largely cover the ingredients of a good and professional shareholder agreement. Strict adherence to the details about the said issues culminates in a finely carved out agreement. A serious study of the agreement provides valuable insight into the rights and duties with respect to the corporation and other shareholders, the visions of the company, and the workforce to achieve these visions. The company should revise a shareholder agreement regularly for any amendments and upgrade the issues, keeping in mind the current scenario.

Frequently seek professional advice from expert professionals, such as tax consultants and legal experts. This advice eliminates some of the botherations that may trouble the company or the shareholder(s) in the future. The contents of the shareholder agreement are not bound by law to be made public. They can be kept confidential or made public according to the consideration of the shareholders. It is in the best interest of the company to have a shareholder agreement to avoid any misunderstanding or inconvenience resulting from the lack of clarity in dispensing the duties or obligations of the company.
About the Author
David Gass is President of Business Credit Services, Inc. His company publishes a free weekly e-newsletter on Small Business Consulting at their web site http://www.smallbusinessconsulting.com
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