A shareholders’ agreement is a key legal document that regulates affairs of a company and describes how a company should be operated. It gives shareholders a say in the company’s management and lists out how the shareholders can deal with their shares. Most importantly, it makes sure the shareholders are treated fairly and their rights are protected.
In my opinion, a shareholders’ agreement is essential for companies including those setup among friends and family members. This is the most important piece of document for running a company, which governs management, sets out all the rights and obligations between shareholders and the company, and guides the decision-making and dispute resolution process in important scenarios. In particular, it also helps to protect the interest of minority shareholders.
In addition to the information relates to share issuing arrangement and the percentage share of ownership, the following topics are commonly covered in a shareholders’ agreement:
- Participation of shareholder in the management of business.
- Reserved matters that require unanimous consent.
- Protection of majority and minority.
- Restrictions on share transfer.
- “Drag-along” and “Tag-along” rights.
- Mechanisms to resolve a deadlock or dispute.
Therefore, whenever a company has more than one shareholder, it is strongly recommended that the parties enter into a written shareholders’ agreement at the outset of business.
