While most legal documents have the capacity to be molded to the will of the drafters, some are more easily shaped than others. Shareholder Agreements, which some know as stockholders' agreements, are in the latter category. Shareholder agreements are, as their name indicates, written understandings between the shareholders of a company.
Companies are created by way of their constitutional documents-articles of incorporation for corporations or operating agreements for LLCs. These documents are what govern a company. Sometimes, however, a supplementary understanding is needed to expand upon the running of the company. Enter the Shareholder Agreement.
Shareholders draft these agreements for a variety of reasons. One of the most compelling is privacy. Articles of incorporation are made available to the public, but most shareholder agreements are not. Another reason is ease of use. Amending the articles of incorporation usually entails a fee to the state and a few days of waiting. Conversely, Shareholder Agreements can be drawn up, put into place, amended, and terminated with relative ease, and with little cost to the shareholders. Next, the agreements can offer additional protection to minority shareholders-or they can specifically deny this protection. This leads into a fourth reason, which is flexibility-the agreements can do whatever the shareholders wish-within reason, of course. Shareholder Agreements are adaptable in a way that constitutional documents may not be.
The agreements' versatility means that not every one will look just like the next. Speaking generally, however, shareholders draw them only for a certain number of reasons-to delineate who controls the company, how they control it, for what period of time, and how these circumstances may or may not change. Different provisions may be more relevant for directors and management than for shareholders, and vice versa.
Directors may be more concerned with such provisions as restrictions on the transfer of shares, especially a stipulation on the right of first refusal; guidelines on share distribution; the duties and rights of management; the composition, duties, and rights of the board of directors; compensation for the board of directors; and change of control provisions. Of interest to shareholders are provisions that talk to the duties and rights of the shareholders; capital contributions; distinctions between the classes of stock, if any, and their prices and vesting dates; dispute resolution mechanisms; and voting rights and rules.
In the event of a conflict between the articles of incorporation and a Shareholder Agreement, the former is controlling. Naturally, in such a case, the value of the latter is considerably undermined. Moreover, with regard to outside parties, the constitutional documents govern the company's actions. Shareholders may be liable to one another for damages where an action breaches the shareholder agreement but not the constitutional documents.
Finally, it should be noted that shareholder agreements may pose inherent, albeit remote risks to their drafters. Their use may have unintended tax consequences if the governing authorities in some countries regard the agreement as a partnership. Likewise, some foreign authorities consider the agreements as evidence of a conspiracy to engage in monopolistic practices. And if a nation requires the agreement to be notarized to be effective, notarial fees may be prohibitively expensive, thereby making the drafted document all but worthless.
All in all, however, Shareholder Agreements, especially as they are used in the US, are much more valuable than they are problematic.
Author Resource:-
Mark Warner is a Shareholder Agreement Research Analyst for RealDealDocs.com. RealDealDocs gives you insider access to millions of legal documents online drafted by the top law firms in the US that you can download, edit and print. Search For Free at RealDealDocs.com.
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