Shareholders Agreement

What is a Shareholders Agreement?

A shareholders agreement is an agreement among a corporation’s shareholders describing how the company should be operated, and setting forth the shareholders’ respective rights and obligations, as between and among themselves. A shareholders agreement includes information on the regulation of the shareholders’ relationship, the management of the company, ownership of shares and privileges and protection of shareholders. It is similar to an operating agreement in an LLC, and it is sometimes also referred to as a partnership agreement. A shareholders agreement is particularly important in the case of a small, closely held corporation in which there are only a few, or a small number of, shareholders who own the stock in the corporation.

The reason is that each of the shareholders, due to the small size of the corporation, will have a large amount of power and control over the corporation, and each of their respective actions, or inactions, could have dramatic consequences at the corporation. In this regard, a small corporation can be contrasted with a large, publicly-held corporation, where the decisions of the vast majority of shareholders has little to no effect on the corporation. Some common terms of shareholder agreement are provisions as to how votes should be conducted, and what should happen to the shares of any shareholder in the case of that shareholder’s death, divorce, or departure from the corporation.