What Is a Shareholder Agreement and Do I Need One?

Having a solid foundation is crucial to any business, and in the context of enterprises that have shareholders, one of the key components of that foundation is a shareholder agreement.

In short, yes, you need one.

A shareholder agreement is a voluntary and consensual contract among and between those individuals who hold shares in the company, and one of its main functions is to protect all financial interests should a major event prevent one of the shareholders from continuing in the business, though it also works to govern all aspects of the business relationship among shareholders.

While shareholder agreements are not mandatory by law, drafting one could help to avoid future litigation between shareholders and also provide a framework for resolution should disagreements arise.

Common components of a shareholder agreement include the following:

Allocation of ownership interests in shares
Division of voting interests
Description of the process for admitting new shareholders
Process for resolving voting disputes
Duties and obligations of shareholders
Provisions for how future capital will be raised, including whether current shareholders are expected to contribute and in what percentages/amounts
Distribution of proceeds
What happens in the event of certain events such as divorce, death, or disability of a shareholder
Procedure for deciding disputes, including choice of law and tribunal

Another issue a shareholder agreement may address is the ownership of any intellectual property — such as the trademarks for the company’s products/services or future inventions created during the life of the company. The agreement should also clearly express what happens to the intellectual property upon dissolution of the business.

Note that even where there is a shareholder agreement in place, disagreements over the agreement itself can occur, particularly related to enforcement. Even the most comprehensive shareholder agreement cannot possibly anticipate every eventual possible occurrence, but by having the above issues addressed, you’re already well on your way to paving the path to success for your new enterprise.

If you’d like more information about drafting a shareholder agreement that works for your business, get in touch. Contact business attorney John Frazier to discuss your situation.