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Key provisions to include within a Shareholders Agreement

Shareholders Agreements are essentially contracts between the shareholders of a business. Contracts can include a variety of provisions and these provisions can help reduce the uncertainty of an outcome during a dispute.

Although each Shareholder Agreement should be tailored to each business’ needs, it is generally wise to include these three key provisions:

 

  • Transfers of shares. Business owners can use shares of the company as incentive for workers to commit to the growth of the business. Although a great motivator, it can pose a problem in the event the relationship deteriorates. Structure a clause within the agreement to address the fate of shares in this situation. Outline the value of shares if sold within the company, which parties are or are not eligible to purchase the shares, how the value of the shares will be calculated and whether or not an employee can keep his or her shares.
  • Dispute resolution. Develop a provision to address deadlocks between shareholders. In many cases, these clauses are often referred to as the “fundamental dispute” clause and are limited to deadlocks on fundamental issues like raising capital or changing the shares.
  • Restricted activities. The Agreement can include the requirement of a “super-majority” of shareholders to make certain decisions. In most cases, the majority shareholder has the power to make decisions. The inclusion of a “restricted activities” clause can outline the need for a certain percentage of shareholders (67 percent, 75 percent, etc.) to agree before making certain decisions, such as paying dividends.

Although these three provisions are likely beneficial for any business’ Shareholder Agreement, additional provisions are likely needed. As such, it is wise to seek legal counsel to discuss your business interests and goals and structure an agreement to meet your needs.

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