What is a Shareholder Agreement?
A Shareholder Agreement, also known as a stockholder agreement or SPA, is a contract between the stock owners of a corporation that addresses the rights, responsibilities, and ownership of a corporation.
The contents of this agreement can vary, depending on the corporation and the shareholders, but it typically addresses:
- Shareholder rights and responsibilities
- Share ownership and valuation
- Management of finances, business, assets, capital, and shares, including how dividend payouts are handled
- Rules for issuing new shares and restrictions on share transfers
- Actions to take upon the incapacitation or death of a shareholder
- Conflict of interest rules, such as non-compete or non-solicitation clauses
- Methods for dispute resolution, such as mediation or arbitration
What is a Shareholder?
A shareholder owns portions of equity, known as shares or stock, in a corporation. If the company performs well, the shareholder profits. If the company performs poorly, the shareholder can potentially lose money.
Generally, the shareholders of a corporation will create a Shareholder Agreement to establish the rules that govern the shareholders’ relationships to the corporation and to one another.
Why should shareholders create an agreement?
A Shareholder Agreement helps keep the corporation running smoothly by addressing important issues such as the transfer of shares and the rights of shareholders and officers. It can also be referred to in the event of future disputes between shareholders.
When should a Shareholder Agreement be created?
It is recommended that a corporation have a Shareholder Agreement in place before business begins, regardless of the size of the company. That way, companies can be sure all of the shareholders are in agreement and understand their rights and obligations to the company.
When should a Shareholder Agreement end?
Including an end date in your agreement is not required, but it is recommended.
If you do not specify an end date, then typically a Termination Agreement would be needed to formally cancel your Shareholder Agreement.
In general, ending your Shareholder Agreement by creating a Termination Agreement should be reserved for instances when:
- There is a small number of shareholders within the corporation
- The company is not considering taking on new shareholders
- All the shareholders get along well
An end date is preferable because it ensures shareholders can cancel the agreement regardless if all parties agree. This is important for times when a difficult shareholder refuses to terminate the agreement despite termination being in the corporation’s best interest.
Keep in mind, even with a cancelation date within the contract, shareholders can renew their Shareholder Agreement at any time before it expires.
What is the difference between a Partnership Agreement and a Shareholder Agreement?
A Shareholder Agreement is similar to a Partnership Agreement, but they are used in different instances (i.e. a partnership versus a corporation).
A Partnership Agreement is used between two or more partners in a for-profit business partnership, whereas a Shareholder Agreement is used by shareholders in a corporation.
What are shareholder rights?
Shareholders have various rights within the corporation, which can include the right to:
- Dividends (which is a payment made to shareholders based on the company’s profits)
- Vote (to implement changes or to elect directors or officers)
- Transfer ownership (by transferring or selling shares)
- Review company records
Shareholder rights also encompass how shares will be treated in the event that a shareholder wishes to exit the corporation. Some common clauses that handle how shares are transferred under such circumstances include:
Right of first refusal clause: This clause comes into effect when a shareholder wishes to sell their shares. Right of first refusal means they must first offer to sell their shares to other shareholders at a fair value. If the shareholders cannot purchase them, the selling shareholder can offer them to a third party.
Tag along clause: Also referred to as piggyback rights, a tag along clause typically applies to majority shareholders who intend to sell a significant portion of their shares or to a proposed sale that will result in a third party becoming a majority shareholder. It protects minority shareholders because a buyer must also purchase their shares at the same price as shares owned by a majority shareholder (therefore meaning they’ve agreed to purchase all the shares).
What is a share valuation clause?
A share valuation clause (sometimes called a stock valuation clause) establishes the method shareholders would use to determine the value of company shares. Valuation would occur when shareholders wish to dispose of their shares by selling or transferring them to another shareholder or after they pass away.
Without establishing a method for share valuation, companies may experience unnecessary uncertainty or disagreement regarding the value of shares.
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