A shareholder agreement is also known as stockholder agreement. It is a legal contract between the shareholders of a corporation, and define the relationships between them and the corporation. The exact details of the contract usually depend on the company’s policies, as well as the decisions of the shareholders. State and federal laws usually also apply.
Typically, however, there are a few common elements found in shareholder agreements. These include the shareholder rights and responsibilities. These vary from one business to the next, but include issues such as their rights to elect company officials including the company chairman and board of directors. The agreement can also make it the shareholders’ obligation to monitor the performance of the company and to use this as a platform for decision making during annual general meetings.
Shareholder agreements also have clauses which broadly specify the mode of management of finances, assets, capital, shares and the business in general. For instance, some firms have policies where they are not allowed to borrow funds above a certain ceiling, unless the shareholders approve of this.
Other critical elements that may be found in shareholder agreements include the actions to be taken in case of death of a shareholder, the methods of conflict and dispute resolution, conflict of interest rules and the modalities of issuing new shares as well as share transfers. In a word, shareholder agreements set forth the rules that govern the relationship between the shareholders and the company. The broadness of such agreements usually necessitates the use of legal professional services during drafting and interpretation of the document.