Shareholders agreement: Overview, definition, and example
What is a shareholders agreement?
A shareholders agreement is a legally binding contract between a company and its shareholders that outlines their rights, responsibilities, and obligations. It governs how the company is managed, how shares can be bought or sold, and how disputes between shareholders should be handled.
For example, a startup with multiple founders may have a shareholders agreement that defines each founder’s ownership percentage, decision-making powers, and restrictions on selling shares.
Why is a shareholders agreement important?
A shareholders agreement protects the interests of both the company and its shareholders by providing clear rules on ownership, voting rights, share transfers, and dispute resolution. It helps prevent conflicts and ensures business stability.
For SMBs, having a shareholders agreement is crucial, especially in partnerships or multi-owner businesses. Without one, disagreements over management, share sales, or decision-making can lead to legal disputes and operational challenges.
Understanding a shareholders agreement through an example
A family-owned business has three shareholders who each own 33% of the company. Their shareholders agreement includes a clause stating that if one shareholder wants to sell their shares, they must first offer them to the other shareholders before selling to an outsider. This right of first refusal ensures that control of the business stays within the family.
In another example, a tech startup raises investment from outside investors. The shareholders agreement grants the original founders veto rights over major decisions, ensuring they retain control even as new shareholders come in.
An example of a shareholders agreement clause
Here’s how a shareholders agreement clause might appear in a contract:
“No Shareholder shall transfer, sell, or otherwise dispose of their shares without first offering them to the existing Shareholders under the same terms and conditions. Any transfer in violation of this clause shall be deemed null and void.”
Conclusion
A shareholders agreement is essential for defining ownership rights, share transfer rules, and decision-making processes among shareholders. It helps prevent disputes and ensures business continuity.
For SMBs, drafting a clear shareholders agreement is a key step in protecting the interests of founders, investors, and stakeholders while maintaining stability in the business.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.