A business venture needs to have a clear set of rules. This preventive measure can help protect the business and each partner when things get complicated. If you have a corporation, you need to prepare a shareholder or stockholder’s agreement.
But do you know how to write a shareholder agreement protecting the corporation? What is this legal document anyway? Below, you’ll find the answers to these questions. We’ll also give you a template so you can start writing the document quickly.
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4 Steps on How to Create Shareholder Agreement
A shareholder agreement is a legal document that sets the regulations for a corporation. Establishing an agreement when starting a business is important, especially if more than one person is involved.
The document should be detailed and describe how to operate the business. It will also include information on how to handle disagreements among shareholders. More importantly, the document should clarify each shareholder’s responsibilities and benefits from the corporation.
Now that we’ve established how important the shareholder agreement is, it’s time to start writing one. Here are the steps involved in writing this document:
1. Decide on what issues should be covered
While the agreement helps prepare for potential disagreements, it’s impossible to detail each eventuality in the document. It’s also important to know that the agreement should only be written within the company’s framework.
For example, if Partner A and Partner B have an ongoing dispute. Neither individual can stop the other from voting a certain way. Instead, the laws of the agreement should decide what to do in such a case.
Here are some of the common disputes that may be covered in the agreement:
- Directors versus members
- Transfer of shares
- Approval of business direction changes
- Injection of debt
- Managing changes in shareholders’ roles
- Joint ventures
- Prevention of a former shareholder from setting up in competition
2. Identify each shareholder’s interests
There are various reasons why a shareholder may decide to invest in a company. For most, it will usually be because they hope to earn money from it. Sometimes, they simply wish to support another person in the business. Whatever the reason, these must be identified from the beginning before drafting your shareholder agreement.
Some of the common interests of shareholders include the following:
- Continuous employment as a director
- Value and timing of dividend payments
- Opportunity to provide business strategy and direction
- Maintaining relationships with customers or suppliers
When writing the agreement, you must identify each shareholder’s reason. This is so the rights of the minority can be protected from the directors’ and other shareholders’ freedom.
3. Identify who will make the decisions
It’s important to identify who can make the decisions in the company. Will it be the shareholders or the directors?
Shareholders can choose to be active or passive in business operations. But to ensure everyone is on the same page, you must set clear boundaries between shareholders and directors.
Conflicts usually arise when one oversteps in the decision-making process. This is why it is important to establish who can make the decisions when you’re writing a shareholder agreement.
4. Establish each shareholder’s voting power
Lastly, you must be clear about each shareholder’s voting power in the corporation. In this matter, you’ll need to establish what “majority” means when making the decisions.
For example, you may decide that the shareholder with over 50% of the shares can control the company. He can also make the decisions that he deems fit. However, some other companies impose ownership of over 75% of shares.
This percentage can be different for every corporation. As such, you must ensure this has been established from the start.
Free Shareholder Agreement Template
Feel free to use our template if you need help in your shareholder agreement creation process. This will allow you to customize the document in no time.
What to Include When Writing a Shareholder Agreement
This document aims to ensure each shareholder will be fairly treated in the corporation. It also serves as a basis for protecting their rights.
Here are the basic things that need to be included in this legal document:
- Date. This is when all signatories have signed the agreement, which goes into effect.
- Number of shares issued. This talks about the number of shares in the corporation that have been issued.
- Capitalization table. This is a table that outlines the names of the shareholders and what their ownership percentage is.
- Restrictions. This discusses any regulations regarding the transfer of shares.
- Pre-emptive rights. This highlights the pre-emptive rights of existing shareholders should they purchase shares to maintain ownership percentages.
- Company sale. This gives details on payments if the company gets sold.
Using Fill to Create Your Shareholder Agreement
Knowing how to draft shareholder agreements can greatly help any corporation. If you are starting a venture with your shareholders, it’s best that you take time to write one.
You can create a free account at Fill to use a customizable template. This will help you save time and even get the signatures of other partners online.