Shareholder Agreements

What Is It?

A “USA” is an agreement entered into by all Shareholders or parties involved in a corporation. this agreement governs the relationship between all shareholders and is the document you will refer to in handling any dispute that may arise between parties. This document also includes rules for directors regarding the management of business within the corporation. Often referred to as a ”˜pre-nup’ this document sets the rules for how shareholders exit the corporation.

Why Have One?

1. Establish rules and expectations for managing and governing the corporation

2. Provide rules for resolving disputes and deadlocks between parties

3. Provide mechanisms for the liquidity or transfer of shares

When Do I Set One Up?

As soon as the company is formed. It’s important that the framework for decision making, the clarification of expectations, and outlining the mechanisms to resolve disputes is understood by all parties and set on paper right from the beginning.

Typical Clauses

Governance

1. Vetoes: allows shareholders to set rules over how important decisions are made. For example, by providing shareholders with a certain amount of holdings veto rights over specified decisions.

2. Mediation or arbitration clauses: Allows the shareholders to provide an alternative mechanism to the courts for resolution of disputes.

Common Provision

A “USA” establishes rights on issuing new shares and restrictions on the transfers of current or existing shares. These restrictions allow existing shareholders to participate in new share offerings and either replace or approve new partners into the business.

Shotgun Clause: A Shotgun clause is what is used when an individual wants out of the company, or one person wants to buy out another shareholder. This allows a shareholder to offer buy the shares of the other shareholders. It also gives the other shareholders an opportunity to purchase the shares of the initiating shareholder at the offered price.

Tag-Along: If a shareholder establishes a third-party purchaser of their shares, a tag-along allows the other shareholders to include their shares in the agreement and sale to the third-party buyer. An additional shareholder could tag-along with the seller and exit the corporation.

Drag-Along: If a majority shareholder decides to sell their shares it can require the minority shareholders to sell their shares to the buyer as well. In the event that a minority shareholder does not wish to allow the transaction, this allows the majority shareholder to proceed with the sale.