share holders assignment

Stock Assignment: Transferring Ownership Rights with Stock Power

1. introduction to stock assignment and stock power, 2. understanding ownership rights in stock, 3. the role of stock power in transferring ownership, 4. ways to obtain stock power, 5. filling out a stock power form, 6. executing a stock assignment, 7. legal considerations in stock assignment, 8. common mistakes to avoid in stock assignment, 9. conclusion and final thoughts on stock power and stock assignment.

Stock Assignment and Stock Power are two terms that are commonly used in the world of stocks and investments. They are often used interchangeably, but they refer to two different things. Stock assignment is the process of transferring ownership rights of a stock from one party to another, while Stock Power is a legal document that authorizes the transfer of ownership rights from one party to another. In this section, we will discuss in detail what Stock Assignment and Stock Power are, how they work, and why they are important.

1. What is Stock Assignment?

Stock Assignment refers to the transfer of ownership rights of a stock from one party to another. This process is typically used when an investor wants to sell their shares to someone else. The seller must sign an Assignment of Stock Certificate form, which is a legal document that transfers ownership rights to the buyer . The buyer must then present the form to the company's transfer agent, who will update the company's records to reflect the change in ownership.

2. What is Stock Power?

Stock Power is a legal document that authorizes the transfer of ownership rights from one party to another. It is typically used when an investor wants to transfer their shares to a family member or a trust. The seller must sign a stock Power form , which is a legal document that authorizes the transfer of ownership rights to the buyer. The buyer must then present the form to the company's transfer agent, who will update the company's records to reflect the change in ownership.

3. What are the differences between Stock Assignment and Stock Power?

The main difference between Stock Assignment and Stock Power is the purpose for which they are used. Stock Assignment is used when an investor wants to sell their shares to someone else, while Stock Power is used when an investor wants to transfer their shares to a family member or a trust. Another difference is the legal document that is used. Stock Assignment uses an Assignment of Stock Certificate form, while Stock Power uses a Stock Power form.

4. What are the benefits of Stock Assignment and Stock Power?

The main benefit of Stock Assignment and Stock Power is that they provide a legal framework for transferring ownership rights of a stock from one party to another. This ensures that the transfer is done legally and that the new owner has full ownership rights to the stock. It also ensures that the company's records are updated to reflect the change in ownership, which is important for tax purposes.

5. What are the risks of Stock Assignment and Stock Power?

The main risk of stock Assignment and stock Power is that they can be used for fraudulent purposes. For example, someone could forge an Assignment of Stock Certificate or a Stock Power form to transfer ownership rights of a stock to themselves. To mitigate this risk, it is important to use a reputable transfer agent and to verify the authenticity of the legal documents.

6. Which option is better: Stock Assignment or Stock Power?

The choice between Stock Assignment and Stock Power depends on the purpose for which they are being used. If an investor wants to sell their shares to someone else, then Stock Assignment is the better option. If an investor wants to transfer their shares to a family member or a trust, then Stock Power is the better option. It is important to use the correct legal document and to ensure that the transfer is done legally to avoid any potential risks .

Introduction to Stock Assignment and Stock Power - Stock Assignment: Transferring Ownership Rights with Stock Power

When it comes to owning stock, it's important to understand the concept of ownership rights. Ownership rights refer to the various privileges that come with owning stock, such as voting rights and the ability to receive dividends. Understanding these rights is crucial for investors who want to make informed decisions about their investments. In this section, we'll take a closer look at ownership rights in stock and what they mean for investors.

1. Voting Rights

One of the most important ownership rights in stock is the right to vote. When you own stock in a company, you are entitled to vote on certain matters that affect the company. These matters can include electing members to the board of directors, approving mergers or acquisitions, and making changes to the company's bylaws. The number of votes you have is typically based on the number of shares you own. For example, if a company has 1,000 shares outstanding and you own 100 shares , you would have 10% of the voting power.

2. Dividend Rights

Another ownership right in stock is the right to receive dividends. Dividends are payments made by a company to its shareholders, usually on a quarterly basis. The amount of the dividend is typically based on the company's profits and can vary from year to year. If you own stock in a company that pays dividends, you are entitled to a portion of those payments based on the number of shares you own.

3. Liquidation Rights

If a company goes bankrupt or is liquidated, shareholders have the right to a portion of the company's assets. This is known as liquidation rights. However, in most cases, shareholders are the last in line to receive payment after creditors and other stakeholders have been paid.

4. Preemptive Rights

Preemptive rights refer to the right of existing shareholders to purchase additional shares in a company before they are offered to the public. This allows shareholders to maintain their ownership percentage in the company and prevent dilution of their shares.

5. Transferability of Ownership Rights

Ownership rights in stock are transferable, meaning you can sell your shares to another investor. When you sell your shares, you transfer your ownership rights to the buyer. However, it's important to note that some ownership rights, such as voting rights, may be restricted for a period of time after the sale.

understanding ownership rights in stock is crucial for investors who want to make informed decisions about their investments. Voting rights, dividend rights, liquidation rights, preemptive rights, and transferability of ownership rights are all important concepts to understand. When considering investing in a company, it's important to evaluate these ownership rights and consider the potential risks and rewards .

Understanding Ownership Rights in Stock - Stock Assignment: Transferring Ownership Rights with Stock Power

Stock power plays a crucial role in transferring ownership of stocks from one person to another. Without it, the process would be more complicated and time-consuming. In this section, we will explore the different aspects of stock power and its importance in transferring ownership.

1. Definition of Stock Power: A stock power is a legal document that authorizes the transfer of ownership of a stock from the owner (the "grantor") to another person or entity (the "grantee"). It is also known as a stock assignment or a stock power form. The stock power form contains the details of the stock being transferred, the name of the grantee, and the signature of the grantor.

2. importance of Stock power : Stock power is important because it provides proof of ownership transfer and protects both the grantor and the grantee. With a stock power, the grantor can transfer ownership of the stock without physically delivering the stock certificate. This avoids the risk of loss or theft of the stock certificate. On the other hand, the grantee can prove ownership of the stock through the stock power, which is crucial for selling the stock or receiving dividends.

3. Types of stock Power forms : There are two types of stock power forms: "blank" and "special." A blank stock power form is unsigned and does not specify the name of the grantee. It is commonly used for transferring ownership of stocks to a brokerage firm or for depositing the stocks into a trust account. A special stock power form is signed and specifies the name of the grantee. It is used for transferring ownership of stocks to a specific person or entity.

4. How to Fill Out a Stock Power Form: Filling out a stock power form is a simple process. The grantor needs to sign the form and specify the name of the grantee. The grantee also needs to sign the form to acknowledge receipt of the stock. The completed form should be sent to the transfer agent or the brokerage firm that handles the stock.

5. Alternatives to Stock Power: While stock power is the most common way to transfer ownership of stocks, there are alternatives. One option is to use a trust. The grantor can transfer the stock to a trust and name the grantee as the beneficiary. The grantee will receive the stock upon the grantor's death. Another option is to use a will. The grantor can specify in the will that the stock should be transferred to the grantee upon the grantor's death.

Stock power plays an important role in transferring ownership of stocks. It provides proof of ownership transfer and protects both the grantor and the grantee. There are different types of stock power forms, and filling them out is a simple process. While there are alternatives to stock power, it is the most common way to transfer ownership of stocks.

The Role of Stock Power in Transferring Ownership - Stock Assignment: Transferring Ownership Rights with Stock Power

When it comes to transferring ownership rights with stock power , there are various ways to obtain this crucial document. Whether you are a shareholder looking to transfer your ownership or a company seeking to issue new shares, understanding the different methods available can help streamline the process and ensure a smooth transition of ownership. In this section, we will explore some common ways to obtain stock power, providing insights from different perspectives and comparing several options to determine the best approach.

1. Directly from the Transfer Agent:

One of the most straightforward ways to obtain stock power is by contacting the transfer agent directly. The transfer agent is responsible for maintaining the shareholder records and managing the transfer of ownership. They can provide you with the necessary stock power forms, which typically need to be completed, signed, and notarized before submitting them back to the transfer agent. This method ensures that the required documentation is obtained directly from the authorized party, reducing the risk of errors or fraudulent activity.

2. Online Stock Power Forms:

In today's digital era, many companies offer the convenience of online stock power forms. Shareholders can access these forms through the company's website or a designated platform. Online forms often include step-by-step instructions and may even provide a notary service. This option can save time and effort, as there is no need for physical paperwork or mailing documents. However, it is essential to ensure the online platform is secure and trustworthy, protecting sensitive information from potential cyber threats.

3. Brokerage Firms:

If you hold your shares through a brokerage account, you can obtain stock power through your broker. Brokerage firms typically have their own procedures for transferring ownership and may require specific forms or documentation. Contact your broker to inquire about the process and any associated fees. While this option may be convenient for shareholders who already have a brokerage account, it may not be the best choice for those who prefer a direct relationship with the transfer agent or have shares held outside of a brokerage account.

4. In-person at a Financial Institution:

Some shareholders may prefer to obtain stock power in person, either at their bank or another financial institution . This option allows for face-to-face interaction and immediate access to the necessary forms. However, not all financial institutions offer this service, so it is important to check beforehand. Additionally, consider any associated fees and potential time constraints when opting for this method.

Comparing the different ways to obtain stock power, the best option ultimately depends on your specific circumstances and preferences. If you have a direct relationship with the transfer agent, obtaining stock power directly from them ensures accuracy and eliminates potential intermediaries. On the other hand, online stock power forms can offer convenience and ease of use, particularly for tech-savvy individuals . Brokerage firms provide a viable option for those already utilizing their services, while in-person visits to financial institutions may be preferred by individuals seeking a personal touch.

Understanding the various ways to obtain stock power is crucial for shareholders and companies alike. By exploring the options available and considering the specific requirements and preferences, individuals can choose the most suitable method to transfer ownership rights efficiently and securely.

Ways to Obtain Stock Power - Stock Assignment: Transferring Ownership Rights with Stock Power

When transferring ownership rights with a stock power, there are several important steps to follow. Filling out the stock power form is one of the most crucial steps in this process, as it legally transfers ownership of the stock from one party to another. In this section, we will explore the process of filling out a stock power form, including what information is required, how to properly fill it out, and what to do after it is completed.

1. Understanding the Stock Power Form

A stock power form is a legal document that is used to transfer ownership of stock from one party to another. It is typically used in situations where the actual stock certificate is not available, such as when the stock is held in a brokerage account. The stock power form contains important information about the stock, such as the name of the company, the number of shares being transferred, and the name of the current owner.

2. Gathering the Required Information

Before filling out the stock power form, it is important to gather all of the necessary information. This may include the name of the company that issued the stock, the number of shares being transferred, and the name and contact information of the current owner. It is also important to have the recipient's information on hand, including their name and contact information.

3. Filling Out the Form

When filling out the stock power form, it is important to be accurate and thorough. The form will typically ask for the name and address of the current owner, as well as the name and address of the recipient. It may also ask for the number of shares being transferred, the date of the transfer, and other relevant information. It is important to double-check all of the information before submitting the form.

4. Submitting the Form

Once the stock power form has been filled out, it should be signed and dated by the current owner. Depending on the situation, the form may need to be notarized or witnessed by a third party. The completed form should be submitted to the appropriate parties, such as the brokerage firm or transfer agent.

5. Considerations When Filling Out a Stock Power Form

When filling out a stock power form, it is important to consider several factors. For example, if the stock is being transferred as a gift, it may be subject to gift taxes. It is also important to consider any restrictions or limitations on the transfer of the stock, such as those imposed by the company or by applicable laws and regulations.

6. Best Practices for Filling Out a Stock Power Form

To ensure that the stock power form is filled out correctly and completely, it is important to follow best practices. This may include reviewing the form carefully before submitting it, double-checking all of the information, and seeking professional advice if necessary. It is also important to keep copies of all relevant documents, such as the stock power form and any supporting documentation.

Filling out a stock power form is an important step in transferring ownership rights with a stock power. By following the steps outlined above and considering the relevant factors, it is possible to ensure that the transfer is completed correctly and legally.

Filling out a Stock Power Form - Stock Assignment: Transferring Ownership Rights with Stock Power

Executing a stock assignment is a process that involves transferring ownership rights from one party to another. It is a crucial step in the stock transfer process, and it requires both the assignor and the assignee to follow specific procedures to ensure a smooth transfer of ownership . In this section, we will explore the steps involved in executing a stock assignment and some insights from different points of view.

1. Review the Stock Power Form

Before executing a stock assignment, it is essential to review the stock power form carefully. This document is a legal instrument that transfers ownership rights from the assignor to the assignee. It contains important information, such as the name of the assignor, the name of the assignee, the number of shares being transferred, and the date of the transfer. Both the assignor and the assignee must sign the stock power form in the presence of a notary public.

2. Choose the Right Type of Stock Assignment

There are two types of stock assignments: a full assignment and a limited assignment. A full assignment transfers all ownership rights from the assignor to the assignee, while a limited assignment transfers only specific ownership rights, such as the right to vote or receive dividends. The type of stock assignment you choose depends on your specific needs and circumstances.

3. Consider the Tax Implications

Executing a stock assignment may have tax implications for both the assignor and the assignee. The assignor may be subject to capital gains tax if the stock has appreciated in value since it was acquired. The assignee may be subject to income tax if they receive dividends or sell the stock at a profit. It is important to consult with a tax professional to understand the tax implications of executing a stock assignment.

4. Choose the Right Method of Transfer

There are several methods of transferring ownership rights, including physical delivery, book-entry transfer, and electronic transfer. Physical delivery involves the physical delivery of stock certificates from the assignor to the assignee. Book-entry transfer involves the transfer of ownership rights through an intermediary, such as a stock transfer agent . Electronic transfer involves the transfer of ownership rights through an electronic network, such as the depository Trust company (DTC). The method of transfer you choose depends on your specific needs and circumstances.

5. seek Professional assistance

Executing a stock assignment can be a complex process, and it is advisable to seek professional assistance. A stock transfer agent can help you navigate the transfer process and ensure that all necessary procedures are followed. A tax professional can help you understand the tax implications of executing a stock assignment. Seeking professional assistance can help ensure a smooth transfer of ownership rights.

Executing a stock assignment is an essential step in transferring ownership rights from one party to another. It requires careful consideration of the stock power form, the type of stock assignment, the tax implications, the method of transfer, and professional assistance. By following these steps, you can ensure a smooth transfer of ownership rights.

Executing a Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

When transferring ownership rights with a stock power, legal considerations must be taken into account to ensure a smooth and legally valid transaction. These considerations can vary depending on the type of stock being transferred and the parties involved. Here are some of the key legal considerations to keep in mind:

1. Type of Stock: The type of stock being transferred will impact the legal requirements for the transfer . For example, transferring common stock may require different legal documentation than transferring preferred stock. It's important to understand the specific requirements for the type of stock being transferred.

2. Parties Involved: The parties involved in the transfer will also impact the legal considerations . For example, transferring stock between family members may require different documentation than transferring stock between unrelated parties. It's important to understand the legal requirements based on the parties involved.

3. Tax Implications: The transfer of stock ownership can have tax implications for both the transferor and transferee. It's important to understand the tax consequences of the transfer and to consult with a tax professional if necessary.

4. Securities Laws: The transfer of stock ownership is subject to certain securities laws, including the Securities act of 1933 and the Securities Exchange act of 1934. These laws regulate the sale and transfer of securities and may require certain disclosures or filings.

5. State Laws: State laws may also impact the transfer of stock ownership. For example, some states require specific documentation or filings for stock transfers. It's important to understand the state laws that apply to the transfer.

When considering the legal considerations for stock assignment, it's important to consult with a legal professional to ensure compliance with all applicable laws and regulations. A legal professional can also help determine the best option for transferring ownership rights with a stock power.

Options for transferring ownership rights with a stock power include:

1. Direct Transfer: A direct transfer involves transferring the stock from one party to another without the involvement of a broker or intermediary. This option may be simpler and less expensive, but may require more legal documentation and may not be available for all types of stock.

2. Broker-Assisted Transfer: A broker-assisted transfer involves using a broker to facilitate the transfer of stock ownership. This option may be more expensive, but may be easier and more efficient, particularly for larger transfers or transfers involving multiple parties.

3. Gift Transfer: A gift transfer involves transferring ownership of the stock as a gift. This option may have tax implications for the transferor and transferee and may require additional legal documentation.

Ultimately, the best option for transferring ownership rights with a stock power will depend on the specific circumstances of the transfer. Consulting with a legal professional can help determine the most appropriate option and ensure compliance with all applicable legal requirements.

Legal Considerations in Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

When it comes to stock assignment, there are several mistakes that people make which can lead to legal and financial complications. It is important to understand the process of transferring ownership rights with stock power and avoid these common mistakes.

1. Failing to Complete the Stock Assignment Form Correctly

One of the most common mistakes made in stock assignment is failing to complete the stock assignment form correctly. This can lead to delays in the transfer of ownership rights and can result in legal complications. It is important to ensure that all the required fields are filled out correctly and that the form is signed and dated by the appropriate parties.

2. Not Having a Properly Endorsed Stock Certificate

Another mistake that people make is not having a properly endorsed stock certificate. This is important because the stock certificate is the physical representation of the ownership rights of the stock. It is important to ensure that the certificate is properly endorsed by the seller and that the buyer has the certificate in their possession.

3. Not understanding the Tax implications of Stock Assignment

Another mistake that people make is not understanding the tax implications of stock assignment. Depending on the circumstances, there may be tax implications for both the buyer and the seller. It is important to consult with a tax professional to understand the tax implications before completing the stock assignment.

4. Not Using a Broker or Transfer Agent

Some people try to complete the stock assignment themselves without using a broker or transfer agent. This can lead to complications and delays in the transfer of ownership rights. It is recommended to use a broker or transfer agent to ensure that the process is completed correctly and efficiently.

5. Not Verifying the Identity of the Buyer or Seller

Finally, it is important to verify the identity of the buyer or seller before completing the stock assignment. This can help to prevent fraud and ensure that the transfer of ownership rights is legitimate. It is recommended to use a reputable broker or transfer agent who can help with this process.

Stock assignment can be a complicated process, but by avoiding these common mistakes, it can be completed successfully. It is important to ensure that the stock assignment form is completed correctly, that the stock certificate is properly endorsed, that the tax implications are understood, and that a reputable broker or transfer agent is used. By following these guidelines, the transfer of ownership rights can be completed efficiently and without complications.

Common Mistakes to Avoid in Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

Stock Power and Stock Assignment are important concepts in the world of finance and investment. These concepts help investors transfer ownership rights of their stocks to another party. In this blog post, we have discussed the details of these concepts and their implications. We have also analyzed the different perspectives and provided insights on how to use these concepts effectively.

1. Importance of Stock Power and Stock Assignment

Stock Power and Stock Assignment are essential tools for investors who want to transfer ownership rights of their stocks to another party. These concepts enable investors to transfer their stocks without having to go through the hassle of selling them. This is particularly useful in cases where the investor wants to gift the stocks to someone or transfer them to another account.

2. Understanding Stock Power

Stock Power is a legal document that enables the transfer of ownership rights of a stock from one party to another. It is an endorsement that is required by the brokerage firm to transfer the ownership of the stock. The stock power must be signed by the owner of the stock and must be submitted along with the certificate of the stock to the brokerage firm.

3. Understanding Stock Assignment

Stock Assignment is a process where the ownership rights of a stock are transferred from one party to another. The process involves filling out a transfer form and submitting it to the brokerage firm. The transfer form must be signed by the owner of the stock and must be submitted along with the certificate of the stock.

4. pros and Cons of stock Power and Stock Assignment

Stock Power and Stock Assignment have their own advantages and disadvantages. Stock Power is a simpler process that requires the submission of a single document, whereas Stock Assignment involves filling out a transfer form. However, Stock Power can only be used if the certificate of the stock is in the possession of the owner, whereas Stock Assignment can be used even if the certificate is lost or misplaced.

5. Best Option

The best option depends on the situation. If the certificate of the stock is in the possession of the owner, Stock Power is the best option. However, if the certificate is lost or misplaced, Stock Assignment is the better option. In any case, it is important to consult with the brokerage firm to determine the best option.

Stock Power and Stock Assignment are important concepts that enable investors to transfer ownership rights of their stocks. These concepts have their own advantages and disadvantages, and the best option depends on the situation. It is important to consult with the brokerage firm to determine the best option.

Conclusion and Final Thoughts on Stock Power and Stock Assignment - Stock Assignment: Transferring Ownership Rights with Stock Power

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Shareholders Agreement

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ContractsCounsel has assisted 78 clients with shareholders agreements and maintains a network of 83 business lawyers available daily. These lawyers collectively have 14 reviews to help you choose the best lawyer for your needs.

A shareholders agreement is a legal contract that outlines the operation of a company, detailing shareholders ' rights and relevant rules and regulations. Such an agreement helps protect the rights of all shareholders and helps them build a relationship with the company. Let us learn more about the important aspects of a shareholders agreement below.

What is a Shareholders’ Agreement?

A shareholders’ agreement is a legally binding contract that outlines the regulations used to run a corporation. This agreement, also called a stockholders’ agreement or SHA, is used to protect the interests of each individual shareholder and establish a fair relationship within the company.

A shareholder agreement will include the rights and obligations of each shareholder, how the shares of the company are sold, how the company will run, and how decisions will be made.

To further understand what a shareholders’ agreement is, read this.

Who Needs a Shareholders’ Agreement?

When a corporation is created and more than one person will be investing money into the company, a shareholders’ agreement is essential. This document should be drafted and signed right when a corporation is formed to avoid any issues or confusion when setting up the company.

A shareholders’ agreement should be used whether a corporation has a lot of investors or just a couple. It should also be used even if the investors are family or close friends.

It can be easy to assume that if you go into business with people you know, you will not have disputes or issues. Even though this may be true, a shareholders’ agreement will protect everyone’s rights and interests and you will always have a clear, fair way to settle a dispute should one arise.

Even if a corporation has articles of incorporation that outline the company’s laws and policies, it is still a good idea to also draft a shareholders’ agreement for extra clarity and protection.

For more information on shareholders’ agreements for small businesses, read this article.

Christina M.

Important Clauses Found in Shareholders’ Agreements

Every shareholders’ agreement should be clear and detailed. Although each agreement will be custom tailored to each individual business, all agreements need to include key components. These components describe how the business will be run, how to resolve issues between shareholders and what each shareholder’s responsibilities and benefits are.

Shareholders’ agreements usually contain the following key provisions:

• A preamble that lists the parties including the company name and all shareholders to be included in the agreement.
• The goals of the agreement.
• How shares will be bought, sold, or transferred (this includes both the optional and mandatory buying-back of shares by the company and what happens in the event of the death of a shareholder).
• Protections for holders of less than 50% of shares.
• A right of first refusal clause.
• Fair price for shares.
• How the company will be run including information about appointing or removing directors, board meetings, management information, banking arrangements and other important financial details.
• Dispute resolution procedures

In addition to these provisions, a shareholders’ agreement should also contain the date, the number of shares issued, the percentage ownership of each shareholder, how votes are decided and how shares are created.

Other important clauses that can usually be found in a shareholders’ agreement include the following:

Clause 1: Director Structure

This clause will regulate the directors of a company. It will detail decision making policies, rights of shareholders to appoint or remove directors, and the powers of directors.

Clause 2: Buying and Selling Provisions

These are the rights and obligations of shareholders to buy or sell their shares. Some instances where shares may need to be bought or sold include insolvency , disability, death, or retirement. This is one of the most important parts of a shareholders’ agreement and should include a way to value shares.

Clause 3: Financing

This clause will include how shareholders contribute capital in the company and what happens if a shareholder can no longer contribute.

Example of Initial Funding Clause in Shareholders' Agreement

Initial contributions. Until the Initial Evaluation Date, each Shareholder shall be required (in accordance with any Contribution Notice which is served on it) to make capital contributions for the purposes and in the amounts specified in the existing Business Plan not exceeding, in aggregate, the value of the Initial Contribution Cap.

Reference :

Security Exchange Commission - Edgar Database, EX-10.2 3 dex102.htm SHAREHOLDERS AGREEMENT , Viewed May 20, 2021, < SEC Link >.

Clause 4: Restrictions on the Transfer of Shares

Restrictions on share transfers allows each shareholder to have some control over who they are doing business with. It is common to first require a director’s approval to transfer shares or to offer first rights to buy shares to existing shareholders.

Example of Restrictions on the Transfer of Shares Clause in Shareholders' Agreement

RESTRICTIONS ON DEALING WITH SHARES

(A) Transfer by a Shareholder of the legal and beneficial title to any Share, Convertible Share or Preference Share is only permitted in accordance with the provisions of clause 12 (Funding and performance tests), clause 17 (Voluntary transfers) or clause 18 (Transfer of Shares on default), or with the prior written consent of the other Shareholder.

(B) Notwithstanding the provisions set out above, no transfer of any Share shall be registered unless and until the transferor complies with the provisions of clause 9.5(D)(ii) (Directors’ interests and fiduciary duties).

(C) Save as set out above at clause 16(A) , no Disposal of any Share, Convertible Share or Preference Share or any legal or beneficial interest in any such share is permitted and the transfer of any Share, Convertible Share or Preference Share (other than in strict accordance with this agreement) shall not be registered.

Clause 5: Dispute Resolution

Dispute resolution is an important clause in a shareholders’ agreement. This lays out how to resolve any conflicts between shareholders as well as consequences for breaches of the agreement.

Clause 6: Confidentiality

Unless otherwise agreed upon, the terms of the shareholders’ agreement are normally confidential to the parties in the agreement.

Here is an article with samples on the Confidentiality Clause .

Clause 7: Shareholder and Director Meetings

Most corporations have scheduled meetings for their shareholders and directors. Laying out the meeting schedule within the agreement can be helpful for structure avoiding confusion in the future. This clause should also contain how meetings will be held with what procedures will be in place and voting procedures.

Clause 8: Protections for the Company

The shareholders’ agreement does not only serve to protect shareholders, but also the company. This clause will lay out rules to protect the company that could include limiting shareholders from being involved with competition or restrictions on shareholder’s interaction with customers.

Every shareholder agreement will be different based upon the needs and structure of the company. The most important thing to remember though is to make sure the agreement is as detailed and easy to understand as possible.

Benefits of a Shareholder Agreement

A shareholder agreement ensures that a company operates efficiently while keeping in mind the needs of individual shareholders. Here are the common benefits associated with the corporate agreement that everyone must know:

• Defines Ownership and Voting: The agreement defines the ownership percentage of each shareholder associated with a company. Moreover, it also outlines the voting rights of the people within the organization.
• Provides Minority Protection: Most shareholder agreements have provisions that safeguard the interests of all minority shareholders.
• Establishes Rules of Share Transfer: The agreement also helps establish the rules and restrictions associated with different share transfers. This includes having the approval of all shareholders before anyone decides to sell or hold the shares.
• Addresses Succession Planning: It addresses issues related to the succession planning process. Such a process helps ensure a smooth transfer of ownership and other management rights within the company.
• Enables Efficient Decision-Making: A shareholder agreement enables efficient decision-making within the company. It does so by delineating each shareholder's roles and responsibilities in essential matters. It also establishes a framework for making decisions in which all stakeholders know their roles and obligations. Moreover, the agreement provides a structured mechanism without disrupting the company's operations. This streamlined decision-making process contributes to the company's overall efficiency and stability.
• Assures Ownership Clarity: Ownership clarity is essential for maintaining a harmonious and functional business environment. A shareholder agreement plays a pivotal role in guaranteeing this clarity by explicitly defining ownership percentages and voting rights for each shareholder. By documenting each shareholder's precise stake in the company, the agreement minimizes the potential for disputes and confusion regarding control and decision-making. This assurance of ownership clarity provides a solid foundation for productive collaboration among shareholders.
• Invests in Minority Shareholder Protection: A shareholder agreement invests in protecting minority shareholders, a critical aspect of ensuring fair treatment and equitable participation in company affairs. The agreement safeguards the rights and interests of minority shareholders through carefully crafted provisions. It helps prevent any undue influence or disadvantage imposed by majority shareholders. This proactive investment in minority protection fosters a sense of security and confidence among all shareholders, contributing to a healthier corporate environment.
• Facilitates Share Transfer Rules: The agreement facilitates the establishment of well-defined rules and restrictions governing share transfers. This facilitation ensures transparency and compliance when shareholders intend to buy, sell, or transfer their shares. Notably, the agreement often mandates that the approval of all shareholders is required before any share sale or transfer takes place. Doing so protects the interests of existing stakeholders and promotes stability within the shareholder group.
• Addresses Succession Planning: Succession planning is critical to long-term corporate sustainability. A shareholder agreement comprehensively addresses this process by outlining the procedures and protocols for the orderly transfer of ownership and management rights within the company. This assurance of a smooth transition in retirement, departure, or other changes in shareholder status contributes to the company's continued success and operational stability.
• Strengthens Conflict Resolution: Conflict resolution mechanisms within the company are strengthened through the shareholder agreement. This proactive approach reduces the risk of internal disputes escalating to a point where they disrupt the company's operations or damage shareholder relationships. The agreement ensures that disputes are managed fairly, efficiently, and with legally binding outcomes by investing in well-defined methods for resolving conflicts.
• Promotes Fair Dividend Distribution: Fair and equitable distribution of dividends is a fundamental concern for shareholders. The shareholder agreement promotes this by establishing clear guidelines for distributing profits among shareholders. It ensures that dividends are allocated according to predefined rules, preventing disagreements or disputes over dividend allocations. This fair dividend distribution promotion enhances shareholders' trust and reinforces their commitment to the company's success.
• Protects Non-Compete and Confidentiality: The shareholder agreement includes non-compete and confidentiality clauses to safeguard the company's interests. These protective measures restrict shareholders from engaging in activities that would compete with the company or disclosing sensitive company information. This protection ensures that the company's intellectual property and competitive edge are preserved, promoting long-term stability and growth.
• Outlines Exit Strategies: A well-structured shareholder agreement outlines clear exit strategies for shareholders, providing a roadmap for selling shares or exiting the company organizationally. This benefits shareholders by allowing them to plan their exit effectively and ensures that the company's operations remain stable during transitions. Having predefined exit strategies contributes to the overall continuity and sustainability of the business.
• Empowers Pre-Emptive Rights: Empowering existing shareholders with preemptive rights is valuable to a shareholder agreement. These rights grant shareholders the initial opportunity to purchase shares before they are offered to external parties. By doing so, the agreement preserves ownership continuity within the existing shareholder group, minimizing potential disruptions and ensuring that shares are transferred among known and trusted parties. This empowerment enhances the overall cohesion and stability of the shareholder base.

Are Shareholder’s Agreements Legally Binding?

Yes. A shareholders’ agreement, once signed, is a legally binding contract. Legally binding contracts require four elements: offer, acceptance, consideration, and the understanding that a contract is being formed.

In the scenario of a shareholders’ agreement, consideration is essential. Generally, consideration is met by the shareholder purchasing company shares. As long as there is an exchange of value, the element of consideration has been fulfilled.

How Do I Write a Shareholders’ Agreement?

If you are starting a corporation and are in need of a shareholder agreement, it is generally a good idea to consult with a corporate lawyer who specializes in these types of contracts .

If you are considering drafting your own shareholders agreement, consider these questions:

Question 1: What issues will the agreement cover?

Question 2: What are the interests of the shareholders?

Question 3: What is the value of each shareholder?

Question 4: Who will be making decisions for the company?

Question 5: How will shareholders vote and how much will each vote weigh?

You will need to be sure that each shareholder is correctly named with their address and phone number. You should also include any officers of the company and who is going to be a managing shareholder.

Shareholder responsibilities, voting rights, and decision-making capabilities should be clearly and explicitly outlined in the agreement.

It is important to remember that unlike articles of incorporation which can be changed with a majority vote, a shareholders’ agreement requires all shareholders to agree to make any changes. It is crucial that this agreement is complete, all encompassing, and says exactly what you need it to say before being executed.

Final Thoughts on Shareholders Agreements

A shareholder agreement is important for both the shareholders and the company. It is because the contract helps outline the rights and regulations of both parties. Moreover, the agreement is deemed enforceable by law in the United States, adding to its benefits list. However, creating or drafting the shareholders' agreement alone takes work. So, it is recommended to approach a knowledgeable attorney who has already worked on such documents earlier. This person must also have relevant expertise about the corporate culture.

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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.

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Keidi S. Carrington brings a wealth of legal knowledge and business experience in the financial services area with a particular focus on investment management. She is a former securities examiner at the United States Securities & Exchange Commission (SEC) and Associate Counsel at State Street Bank & Trust and has consulted for various investment houses and private investment entities. Her work has included developing a mutual fund that invested in equity securities of listed real estate investment trusts (REITs) and other listed real estate companies; establishing private equity and hedge funds that help clients raise capital by preparing offering materials, negotiating with prospective investors, preparing partnership and LLC operating agreements and advising on and documenting management arrangements; advising on the establishment of Initial Coin Offerings (ICOs/Token Offerings) and counseling SEC registered and state investment advisers regarding organizational structure and compliance. Ms. Carrington is a graduate of Johns Hopkins University with a B.A. in International Relations. She earned her Juris Doctorate from New England Law | Boston and her LL.M. in Banking and Financial Law from Boston University School of Law. She is admitted to practice in Massachusetts and New York. Currently, her practice focuses on assisting investors, start-ups, small and mid-size businesses with their legal needs in the areas of corporate and securities law.

I am a licensed and active NY and CT Contracts Attorney, with over 20 years of diverse legal and business experience. I specialize in reviewing, drafting and negotiating commercial agreements. My practice focuses on working with small business clients as well as clients from international brokerage firms on acquisitions, especially in the Ecommerce space; drafting, negotiating, reviewing and advising on business agreements; ; breach of contract issues, contract disputes and arbitration. I am licensed to practice in New York and Connecticut, and am a FINRA and NCDS Arbitrator. My experience includes serving as General Counsel to small businesses. This entails reviewing, updating and drafting contracts such as employments agreements, asset purchase agreements, master services agreements, operating agreements and a variety of business and commercial contracts. Additionally, I assist clients with business strategies, contract disputes and arbitration. My diverse experience allows me to give my clients a well-rounded approach to the issues they face. I have been at top AML law firms; a Vice President at an Investment Bank, a Civil Court Arbitrator presiding over cases in contract law, commercial law, a Hearing Officer, presiding over cases and rendering written decisions, and a Judicial Clerk to a Civil Court Judge. It would be a privilege to assist you and your business with my services.

Experienced attorney and tax analyst with a history of working in the government and private industry. Skilled in Public Speaking, Contract Law, Corporate Governance, and Contract Negotiation. Strong professional graduate from Penn State Law.

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I am an attorney licensed in both California and Mexico. I offer a unique blend of 14 years of legal expertise that bridges the gap between diverse legal landscapes. My background is enriched by significant roles as in-house counsel for global powerhouses such as Anheuser-Busch, Campari Group, and Grupo Lala, alongside contributions to Tier 1 law firms. I specialize in navigating the complexities of two pivotal areas: AI/Tech Innovation: With a profound grasp of both cutting-edge transformer models and foundational machine learning technologies, I am your go-to advisor for integrating these advancements into your business. Whether it's B2B or B2C applications, I ensure that your company harnesses the power of AI in a manner that's not only enterprise-friendly but also fully compliant with regulatory standards. Cross-Border Excellence: My expertise extends beyond borders, with over a decade of experience facilitating cross-border operations for companies in more than 20 countries. I am particularly adept at enhancing US-Mexico operations, ensuring seamless and efficient business transactions across these territories.

I'm an attorney available to help small businesses in Georgia get started with initial business set-up, required filings, tax strategies, etc. I'm also available to draft, review, and negotiate contracts. I can draft and file real estate quit claims as well. My experience areas include small business startups, information technology, technology innovation, real estate transactions, taxes, community associations, intellectual property, electrical engineering, the business of video game development, higher education, business requirements definition, technology consulting, program management, and the electric utility industry. I work part-time for a local law firm and part-time in my solo practice. I'm also an adjunct professor at Southern New Hampshire University teaching business innovation and business law. In addition, I'm part owner, legal counsel to, and a board member of a virtual reality video game development company. I am a member of the Georgia Bar Association. Please reach out if you need attorney, documentation or consulting help in any of those areas!

I was born and raised in New York and am a dual national of the U.S. and France. I am admitted to the bar of New York where I have my base and I have also lived and worked in France and Italy for many years. My practice is virtual with most business conducted by video conference, email and phone calls. I meet clients, co-counsel and others in person at their locations as needed. I obtained my law degree from Boston University. My undergraduate studies were done at Fairfield University, the University of Florence and the American University of Paris. I served as general counsel to the French consulate in Boston from 1993 to 1999 representing the French government and French citizens living and doing business in New England. My clients have included the City of New York, the New York Stock Exchange and numerous dot coms, negotiating and drafting tech contracts and advising them on international business issues. In my asset recovery and investigation work, I have obtained multi-million-dollar judgments against defendants in fraud cases. Please visit my website: ptd-law.com

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How to track shareholders agreements.

I am a business owner and I have recently incorporated my business. As part of the incorporation process, I have created a shareholders agreement with my co-founders. I am looking to ensure that this agreement is properly tracked, documented, and monitored over time. I am seeking guidance on the best methods to track shareholders agreements and any advice on how to ensure the agreement is being followed.

There are cap table management companies such as Carta and Pulley, that can help with this (for a fee). As long as your company has only issued common stock, maintaining a cap table and stock ledger in Excel is more than adequate. I also recommend storing PDFs of the stock purchase agreements in a cloud-based folder labeled "Stock Purchase Agreements." In terms of officer roles, the corporation's Secretary is responsible for maintaining these shareholder records.

Small Business

Shareholders agreement and dividend policies?

I am a shareholder in a small business and am looking to understand the implications of a shareholders agreement and dividend policies on my ownership rights. I am considering entering into a shareholders agreement but want to ensure that I understand how dividends will be paid out and what rights I will have to receive my share of profits.

The shareholder agreement should specify your ownership rights and the policy on dividends. Or, the LLC Operating Agreement or Corporate By Laws could state when, to who and how frequent dividends are given out. Without seeing the shareholder agreement it is difficult to say what your rights will be and how the dividends will be paid out as each small business is unique.

Shareholders agreement and indemnification?

I am a founder of a startup business and I recently entered into a Shareholders Agreement with my business partners. I am looking to understand how the agreement handles indemnification for the shareholders. I am seeking clarity on the extent of liability that I may be held responsible for as a shareholder.

The answer to your question will largely depend on the specific terms of the Shareholders Agreement, and whether the claims, and potential liability, come from a third party, the corporation itself, or your fellow shareholders. It might also depend on any other role(s) you have with the corporation as a director, officer, employee, and/or agent. A Kansas statute (K.S.A. 17-6305) provides specific parameters regarding a corporation's basic indemnity obligations for its directors, officers, employees, or agents. However, a shareholders agreement, the articles of incorporation, and/or bylaws might provide for more details regarding an indemnification review and approval process, the advancement of fees, or other requirements or protections. Related to indemnification by the corporation itself, the existence and extent of any insurance coverage for directors and officers liability (a D&O policy) could be a vital consideration in certain situations. You should consult with an experienced attorney regarding the specific terms of your Shareholders Agreement, any other relevant corporate documents, and the particular concerns you might have to make sure you fully understand the extent of any protection provided, and whether there are any uncertain areas or issues that need to be addressed.

Massachusetts

Should I form a corporation around my research if I don't plan to conduct any other forms of business (e.g., hire, sell, or raising funding) in the next year?

Should I form a corporation around my work if I don't plan to conduct any other forms of business (e.g., hire, sell, or raise outside funding) in the next year? My research is computational in nature (can be done on my laptop) and doesn't require many resources.

The answer to this questions to some degree depends upon your tolerance for risk. If in performing your "business" you are not exposing yourself in any way to the outside world, e.g., hiring, selling, inviting investors, etc., then you may no little to no liability exposure. However, if there is any aspect of your work that would or could develop into something which does involve others, or which is relied upon by others, then the safest path would be to incorporate or form an LLC. LLC's are more expensive to maintain in Massachusetts, i.e., $500 annually, but require less paperwork (no shares to consider, etc.). An LLC should have an operating agreement, even with a single member to clearly distinguish the member as an individual from the LLC as a company. Incorporation is more expensive in the early stages as it requires you to pay your fee to the Secretary of State (about $275), which recurs annually. It is more heavy in terms of annual meeting minutes of shareholders, and other formal documents, and can be a bit more expensive as incorporating will require a shareholder's agreement and other documentation at the outset (not repeated annually).

Connecticut

Pros & cons of shareholders agreements?

I am a shareholder in a small business and am looking to draw up a shareholders agreement. I understand that a shareholders agreement can protect my interests as a shareholder, but I am not sure of the pros and cons of such an agreement. I would like to know more about the benefits and drawbacks of having a shareholders agreement in place.

Shareholders have rights and powers under the corporate law of the jurisdiction in which the company is incorporated. But many stockholders, especially in private companies, demand additional powers and protections.

Quick, user friendly and one of the better ways I've come across to get ahold of lawyers willing to take new clients.

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Key clauses in a shareholders agreement

What is a shareholders’ agreement?

A shareholders’ agreement is a legally binding contract among the shareholders of a company that sets out their rights and obligations, maps out how the company should be managed, establishes share ownership, and share transfer rules – all in order to provide clear solutions to contentious scenarios that may arise in the future.

In contrast to the articles of association of a company, a shareholders’ agreement is a private, confidential document that does not need to be filed at Companies House. It is often a more appropriate document to address sensitive matters such as the company’s financing, assignments of intellectual property rights, the directors’ compensation, the procedure for transfer of shares, and other matters that may need to be kept confidential.

Both documents, the shareholders’ agreement and the articles need to work cohesively. If there are contradictions, it can be complex to make decisions and be aligned with the correct procedures.

How can a shareholders agreement provide safety?

It is often difficult to foresee a conflict at the beginning of a new business relationship, especially when a company is set up with friends and relatives . Consequently, the idea of legally formalising the relationship can seem unnecessary.

Unfortunately, the reality is much more complex and disagreements may happen. Think of a shareholders’ agreement as your insurance policy that offers protection against unforeseen circumstances and disputes that may emerge in the future – be it with your co-founders, investors or directors. When conflicts happen, having a solid legal framework is essential.

Without a shareholders agreement, any disputes will have to be settled by what is contained within the articles of association. However, this may not be enough protection. Shareholders’ agreements contain provisions that pre-empt disagreements and set out appropriate ways to address disputes, whereas the articles of association usually prevent this from happening.

The clauses explained below are not all but just some of the clauses a shareholders agreement includes. Please get in touch with a solicitor to discuss your specific requirements.

Tag along and drag along rights

Tag along rights is the right of minority shareholders to have their shares bought on the same terms and for the same price as majority shareholders who are selling their shares to a third party.

Without tag along rights, in the event that a majority shareholder leaves the company, the minority shareholder could be left with new and unfamiliar partners. Tag along rights helps protect the minority shareholder, as it provides an exit route from the company to avoid this.

Drag along rights require the minority shareholders to sell their shares to a bona fide purchaser, on the same terms and for the same price as a majority shareholder. For example, when the majority shareholders (usually more than 75% of shares) in a company are selling to a third party, they can compel the minority shareholders to join in the sale, for the same price and on the same terms.

Drag along rights are beneficial to the majority shareholder because the potential offering of the total shares in a company serves as a good incentive to a potential buyer. Nonetheless, these types of clauses are also beneficial for the minority shareholders as terms for purchase will be the same as the majority shareholders.

Pre-emptive rights and right of first refusal clause

These clauses protect existing shareholders from the involuntary dilution of their stake in the company. Pre-emption rights provide the company’s existing shareholders first offer on an issue of new shares; or first refusal over the sale of existing shares.

In the context of a company creating new shares, shares are first offered to existing shareholders in proportion to their holdings before being offered to any new buyers. This allows shareholders to preserve their shareholding percentage in a company, provided they have sufficient funds to purchase the new shares being issued.

In the context of an existing shareholder of a company selling their shares, a pre-emption right is a right of first refusal in favour of the remaining shareholders. The purpose of such rights is to preserve the original shareholder base and limit the ability of a third party to acquire shares in a company.

Usually, the selling shareholder must offer their shares to the remaining shareholders on the same terms agreed with the proposed buyer before selling the shares to the proposed buyer.

Good leaver bad leaver clauses

If a shareholder decides to leave the company, good leaver bad leaver clauses will dictate the terms on which their shares are sold and the value they will receive for their shares.

A good leaver is an employee who departs from the company because of death, retirement, permanent disability or permanent incapacity through ill-health, redundancy (as defined in the Employment Rights Act 1996 ), dismissal by the company which is determined by an employment tribunal or at a court of competent jurisdiction from which there is no right to appeal, to be wrongful or constructive; or any reason after 3 (three) years from the date of becoming an employee shareholder.

A bad leaver is an employee who departs from the company on bad terms or circumstances, such as a breach of their contract of employment, gross misconduct or leaves within a certain defined period.

A good leaver can but not mandatory to sell their shares on departure. However, a bad leaver is obliged to sell his shares on exit to the other shareholders and will then get simply the nominal value of the shares.

Non-competition clause

Non-competition clauses clarify when and how a shareholder may carry out rival activities during and after his time as a company shareholder. It eliminates any ambiguity, including the dos and don’ts, the scope and the period of these restrictions.

The aim of this clause is to ensure that internal knowledge, which is crucial for the company to stay competitive, stay confidential.

However, you should be aware of the fact that mere incorporation of non-competition clauses, does not necessarily mean they are legally binding and enforceable. They must be reasonable and not drafted in an excessively broad manner

Deadlock resolution clause

Pre-agreed dispute resolution mechanisms allow overcoming deadlocks that may drive the business into a dead end.

This can occur when any of the shareholders are willing to change their decision in 50:50 owned companies or when a super-majority or unanimous consent is required but cannot be attained.

The shareholders’ agreement must define what constitutes a deadlock and the process to follow if this situation occurs. There are various types of deadlock resolution clauses, each bearing different implications. All deadlock clauses tend to boil down to a requirement of one party to sell their shares to the others so that control changes and the remaining shareholders can pass a vote about the matter.

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Our legal team can help you prepare a shareholders’ agreement that is specific to the needs of your company and co-founders.

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Our legal commentary is not intended to be a comprehensive review of all developments in the law and practice. Please seek legal advice before applying it to specific issues or transactions.

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Anatomy of a shareholders’ agreement

Key terms and explanations

A shareholders’ agreement (SHA) is a contract between a company’s shareholders and often the company itself. A SHA specifies shareholders’ rights and obligations, regulates the management of the company, ownership of shares, privileges, voting and various protective provisions for shareholders. A SHA aims to bind shareholders to rules to preempt issues that could become contentious in the future.

While articles of association are the basic constitutional documents for all companies, they are typically standardised and mandatory. Articles of association bind a company and its shareholders in their capacity as shareholders and articulate the responsibilities of the directors, the kind of business to be undertaken and the means by which the shareholders exert control over the board of directors.

A SHA may contain terms found in articles of association; however, a SHA is typically more extensive and provides more protection to shareholders. There is no standard form, which makes SHAs flexible to fit the specific needs of shareholders. Articles and SHAs are often complementary. In many jurisdictions, articles of association can be amended only by the passage of a special resolution (75% or more of the shareholders present and voting at a general meeting). However, a SHA often requires unanimous agreement for its revision but can also require supermajority approval (a number of votes far greater than half of the shares with a right to vote but less than 100%).

Additionally, a SHA is private, between the parties to the SHA while articles of association are public, which makes them inappropriate for addressing matters such as director remuneration and the provision of private contact details or other sensitive or confidential internal matters. Furthermore, a SHA is an inexpensive way to minimise the potential for business disputes by clarifying how certain decisions must be made as well as providing a framework and procedures for dispute resolution.

While a SHA and articles of association should not contradict each other, a SHA can contain a supremacy clause to ensure the SHA overrides the articles of association (in the event of an inconsistency the shareholders can then amend the articles accordingly). Because articles of association follow a statutory model they are unable to deal with matters which are personal to the shareholders as this would fetter the company’s statutory powers. Conversely, a SHA may deal with all aspects of the relationship between the shareholders and can address particular issues unique to those shareholders or that company and even indicate further agreements that must be entered into between individual shareholders and the company such as directors’ employment agreements, management agreements and technology transfer agreements (e.g., intellectual property licences, patents, trademarks or copyrights) among other things.

This article does not exhaustively address all the possible terms and variations of a SHA but those that are most commonly used. SHAs should ideally be entered into at the inception of a company between the parties who intend to form it and will be its initial shareholders, though SHAs can be entered into after a company is formed and operating. Specific transactions or the needs of different stage investors often require different terms and will likely be subject to negotiation and possible later amendment. There can also be variations of terms in the case of companies with different kinds of shares, as different share classes carry different rights and obligations that are normally specified in a company’s articles of association; however, all shareholders, regardless of class, are typically bound by a SHA. This article does not consider the laws of any specific jurisdiction.

Share transfers

A SHA usually addresses share transfers. The three kinds of share transfers that are commonly covered are: 1) permitted; 2) voluntary; and 3) automatic.

Permitted transfers  are often share transfers from an existing shareholder: to another existing shareholder; to an entity controlled by an existing shareholder; or to an existing shareholder’s relative (e.g. spouse, child, parent, the spouse of such relative or to a trust created for the benefit of an existing shareholder or its relatives). In this instance, a ‘relative’ can be defined as broadly or as narrowly as the shareholders desire or can be disallowed entirely. Typically, a SHA will contain clear language that, in the event of a permitted transfer, there must still be consent by a certain voting threshold of the remaining shareholders (those not transferring their shares).

Voluntary transfers  usually refer to the disposition of an existing shareholder’s shares via a straightforward sale, an assignment, encumbrance or pledge; this can include direct or indirect transfers to receivers, creditors, trustees or receivers in bankruptcy proceedings.

Automatic transfers are typically triggered when a shareholder: dies; is convicted of a crime; is dissolved or liquidated (if the shareholder is a company); files for bankruptcy; has its employment with the company terminated (where the shareholder is also an employee); materially breaches the SHA; materially breaches other referenced ancillary agreements that could harm the company; or breaches a duty to the company, among other things. Shareholders can determine what acts or omissions will trigger an automatic transfer and as long as clearly specified in the SHA, they are binding. 

Transfers restrictions exist to protect the company and the other shareholders from undesirable third parties that could become shareholders or protect the company should an existing shareholder breach its duty to the company or put itself in a situation that could significantly damage the company’s reputation.

Buyback rights and rights of first refusal

A SHA can give a company buyback rights so that in the event of any transfer other than a permitted transfer, the company will have the exclusive right to purchase those shares. If such a provision is included in a SHA, the price for such buybacks is typically determined by a valuation mechanism specified in the SHA. In the case of a voluntary transfer, the price may be based on the value attributed to the shares by a proposed bona fide transferee (the person to whom the shares are to be sold or otherwise transferred). In the case of an automatic transfer, the purchase price would typically be the fair market value determined by a qualified appraiser or based on the value of the company’s shares as declared by the company’s board of directors at its last annual meeting. It should be noted that company buybacks typically must be made using undistributed profits of the company and are normally considered a share capital reduction, which involves a number of procedures to extinguish the shares.

A SHA also often gives shareholders rights of first refusal so that, if the company does not exercise its buyback rights or only partially exercises them, the non-transferring shareholders will have a priority right to purchase those shares in proportion to their existing share ownership. A SHA should clearly articulate the detailed mechanism by which shareholders can exercise their rights of first refusal and how shares so acquired are to be paid for. In the case of a voluntary transfer, the non-selling shareholders may have the opportunity to acquire more than their pro-rata proportions of shares if any of the other non-selling shareholders do not exercise their rights of first refusal. However, in the case of an automatic transfer, the non-selling shareholders must normally acquire all the ‘offered’ shares. If, for some reason, the non-selling shareholders are unable to fully-exercise their rights of first refusal then the company would have to buy back the shares otherwise those shares could end up in undesirable hands. The SHA can specify that in this instance payment for the shares will be made in instalments over a specified period. 

To be clear, rights of first refusal apply to the right to purchase existing shares held by another shareholder (as opposed to pre-emption rights, which are a form of anti-dilution protection that gives a shareholder the right to maintain its proportional ownership interest in relation to shares issued in the future).

Tag-along (piggy-back) rights

In the case of a voluntary transfer, the selling shareholder must ensure the terms of the offer to purchase its shares is also extended to the other shareholders in proportion to their respective share ownership. Tag-along rights exist to protect minority shareholders so, if a majority shareholder sells its shares, it gives the other shareholders the right to join the transaction.

Thus, piggy-back rights protect minority shareholders by giving them the right, but not the obligation, to sell shares together with a majority or stronger shareholder. This protects minority shareholders from being forced to accept a deal on lesser terms or being forced to remain a shareholder in the company after a majority sale.

Drag-along rights

Drag-along rights enable a majority shareholder to force minority shareholders to join in the sale of a company. The shareholder doing the dragging must give minority shareholders the same price, terms and conditions as any other seller. 

A company merger or acquisition normally triggers a drag-along right because buyers usually seek complete control of a company. Drag-along rights help to eliminate minority owners and allows for the sale of 100% of a company's securities to a potential buyer. Drag-along rights are meant to protect the majority shareholder. However, drag-along rights also benefit minority shareholders because they require the price, terms, and conditions for the sale of shares to be identical for all shareholders, which can enable minority shareholders to realise sales terms that may otherwise be unattainable.

Information rights

All shareholders have rights to company financial and management reports that are usually provided annually. Larger shareholders may be accorded the right to reports on a monthly or quarterly basis. Larger shareholders may also negotiate rights to inspect company records, which can entail company visits, in person discussions with company officers and the ability to copy records, among other things.

• Board of directors

A SHA will typically specify the number of initial board members (and often their names and other details) and sometimes the rights of specific shareholders to appoint a certain number of board members. Other shareholders without the right to appoint directors must vote in accordance with the company’s articles of association.

Protective provisions

In this clause of a SHA, provisions often exceed the protections in statutory or standard articles of association and provide supermajority provisions to approve certain acts. A supermajority requires a large majority of shareholders (generally 67% or more) to approve important changes. Standard articles of association often only require a vote by a simple majority (50%) for numerous issues. Supermajority provisions are protective because they require a large number of shares to vote to approve matters such as, share buybacks, mergers and acquisitions or dispositions of assets (including intellectual property), issuance of new company securities, amendments to the company’s articles of association, adjustments to the number of board members, entering into obligations or debt commitments in excess of a certain threshold and the decision to sell shares to the public, among other things. 

Shareholder non-competition and non-disclosure obligations

Shareholders will often have access to a company’s trade secrets, standard operating procedures, customer and source lists, research and development, financial details and other sensitive or confidential information. A SHA can include non-disclosure and non-competition clauses that bind shareholders to secrecy and prevents them from working for, with or on behalf of competitors or such other parties that could damage the interests of the company. Additionally, this language can also include a non-solicitation clause that restricts or blocks a shareholder from doing any business with any company or person that was or is a client or customer of the company. 

Additional shareholders, transferees and deeds of accession

If capital is raised which brings in new shareholders, or where an existing shareholder transfers shares to any third party by any number of means (including family members), such shareholders must be bound to the SHA. In order to achieve this, a SHA should clearly specify that any new shareholder or transferee must be a party to the SHA prior to receiving the shares. This can be achieved by requiring such a transferee or later share purchaser/investor to sign a document in the form of a deed whereby they agree to be bound by all the terms of the SHA. Such a document is a ‘deed of accession’ or ‘deed of adherence.’

Funding and future issuance of shares

All companies have funding requirements and sometimes working capital and cashflows are insufficient to meet its needs or growth requirements. A SHA should specify the methods of seeking additional capital and the priority in which such funding sourcing should be sought. Such additional funding is often obtained via: external funding, including mezzanine financing (convertible debt sometimes with a sweetener such as warrants), from outside investors and traditional loans from banks or other financial institutions; shareholder loans; and cash calls. The order in which such additional funding is sought should also be specified. 

External funding, and related terms and conditions, is usually determined by a company’s board of directors and must comport with any protective provisions included in a SHA. The SHA, in this instance, may specify that such external funding must be obtained without any guarantees or support from the shareholders (unless each gives prior consent). 

A shareholder loan is typically a form of debt-financing provided by shareholders. It is commonly the most junior debt issued by a company. Therefore, because it is subordinate to other more senior loans, other more ‘senior’ creditors will have priority rights to repayment of debts owed by the company. Shareholder loans may also carry long maturities with low or deferred interest payments. Shareholder loans can also be convertible into [a class of] shares. This form of financing is typical in the case of young companies that are unable to raise debt from banks.

A cash call often occurs as a last resort. Cash call clauses typically provide that if the company requires additional funding and cannot obtain such funding externally then the shareholders must, with advance notice, provide cash in proportion to their share ownership in the company. Such SHA provisions will normally specify if cash calls will be structured as an outright sale of shares, a shareholder loan or a loan convertible into shares. 

If any shareholder fails to subscribe for all or part of its pro-rata proportion of cash call shares by the deadline specified, then the other shareholder(s) can acquire those remaining shares. Where a cash call results in the acquisition of new shares by a shareholder directly or via a loan convertible into shares, the net result will be the dilution of the shareholdings of those shareholders that failed to participate in the cash call.

Cash call clauses ensure shareholders continue to invest funds in the company and reward shareholders that invest in the company when it is needed. Shareholders should consider the possibility of a cash call when investing in a company in relation to their finances and liquidity. 

Shotgun (buy-sell) clause

A shotgun clause forces a shareholder to sell its stake or buy out an offering shareholder. It is a mandatory purchase and sale mechanism between shareholders triggered when one shareholder makes an offer to another shareholder to purchase or sell all of its shares. If one shareholder makes an offer to purchase the shares of another shareholder, the shareholder that receives the offer must either 1) sell its shares at the offered price or 2) buy the shares of the shareholder that made the offer for the same price and conditions. 

This mechanism ensures the shareholder that makes the initial offer cannot offer to purchase the shares of the other shareholders at a significantly lower price than it would be reasonably willing to accept.  However, the price, or method of determining the price in this case is not pre-set. A shotgun clause is effective when shareholders cannot get along or fail to agree on the management of the company by allowing one to buy out the others. This can also help to avoid lengthy and costly dispute resolution. However, if one shareholder has limited liquidity or capital it would be at a disadvantage vis-à-vis another shareholder with deeper pockets that knows of the other shareholder’s limited resources. The ‘wealthier’ shareholder can make the ‘poorer’ shareholder an offer to purchase its shares at a heavily discounted price knowing the weaker shareholder cannot raise that amount to acquire the offeror’s shares in order to reverse the buy-out offer per the terms of a standard shotgun clause. 

Put and call options

Put options  in SHAs give a shareholder a right, but not an obligation, to sell its shares back to the company (or the other shareholders) at a future date or upon one or more specified events for a specific price or one determined by a pre-specified formula. Investors that want to be able to exit a company early because it fails to achieve certain revenues by a specified date often require a put option. A put option can specify that a shareholder may sell all or only a portion of its shares back to the company (or the other shareholders). A caveat with respect to put options is that the company or remaining shareholders may not have the funds to buy out the shareholder exercising the put. One way to mitigate this problem if there must be a put option is to specify that payments can be in instalments, and until fully paid, the put shares will be held in escrow. In this instance, it would be important to specify who will have the voting rights attached to the shares in escrow.

Call options  in SHAs entitle shareholders or the company to compel a shareholder to sell its shares to them or the company for a specific price or one that is determined by a pre-determined formula. A call option encompasses different triggers than that for automatic transfers and can be an effective way of removing a shareholder from a company. A call option can be restricted and tailored, becoming exercisable on or by a future date or triggered by certain events, such as where: the shareholders cannot agree on certain specified matters; the required level of approval for specific matters such as capital expenditures or dividend payments cannot be achieved; or a shareholder is simply a problem, causes trouble or is incompatible.

To clarify, a shotgun clause requires one shareholder to make an offer to another shareholder, which in turn triggers reciprocal rights of purchase or sale. A put and call option will specify a price or clear means of determining a price whereas a shotgun clause allows the offeror to set a price. Additionally, an option needs to have a clear exercising trigger whether a date or some event whereas a shotgun clause can be invoked merely by an offer to buy or sell.

Anti-dilution

Anti-dilution clauses typically arise in the context of raising capital or where more shares are issued. Dilution is simply a reduction in a shareholding that can either be a dilution of value (economic dilution) or relative ownership (percentage dilution). Anti-dilution provisions give an investor the right to maintain its proportional ownership of a company by allowing it to buy a proportionate number of shares of any future issue of shares of the company at specified or adjusted prices. 

Percentage dilution occurs if an existing shareholder does not purchase that number of newly issued shares necessary to maintain its current proportional ownership (e.g. if a shareholder currently owns 10% of a company’s shares it must purchase 10% of newly issued shares to maintain its relative ownership). 

Economic dilution reduces the value of an existing shareholder’s investment and occurs if shares are issued at a price that reduces the average value per share. Economic anti-dilution provisions protect investors from ‘down rounds,’ the risk of new shares issued by the company at a lower price than at the time the investor made its investment. If future capital raises occur at higher valuations then anti-dilution provisions are unlikely be triggered.

If, for example, an investor buys preferred shares in a company for $20 each, convertible on a one-for-one basis into common stock and the company later conducts another round of capital raising that values the common shares at $15 each (a down round), the investor’s shares would be devalued (economic dilution). The investor could not convert its preferred shares into common shares without losing $5 per share. An economic anti-dilution provision would protect that investor by specifying that if the company issues shares at a price lower than in the prior round in which that preferred shareholder invested, then it can obtain more shares of common stock when it converts in order to make it whole.

A number of kinds of anti-dilution provisions are normally found in SHAs, including preemptive rights, ratchet and weighted-average provisions. 

Pre-emptive rights, the most basic and common form of percentage dilution protection, give shareholders the right, but not the obligation, to buy new shares issued by a company in the future on a pro-rata basis in order to maintain their proportional ownership of shares. This right can apply to all classes of shares or only certain classes of shares. 

Full ratchet anti-dilution, a form of economic dilution protection gives an investor the right to buy shares at the new lower price/valuation and provides the greatest protection for investors but is the most restrictive if there will be multiple fundraising rounds. 

Weighted-average anti-dilution is also a form of economic dilution protection and gives an investor the right to acquire shares at a price that accounts for the difference in the old and new prices and is more company-friendly than full ratchet anti-dilution.

Under full ratchet anti-dilution, when a shareholder converts its preferred shares into ordinary shares, the conversion price of its preferred shares will be reduced to reflect the share issue price of the new round. This means that a preferred shareholder can convert its preference shares at the new, lower price. If the shareholder holds ordinary shares, additional shares will often be issued after the new round to make it whole. In both cases, the investor will receive more shares for its initial investment to ensure its stake in the company is not diluted.

Under weighted-average anti-dilution, the conversation rate equals a weighted average of the prior and new share issuance price. If this case, the SHA should include a formula to calculate the weighted average share price based on the 1) amount raised by the company before the additional fundraising round and 2) the average price per share compared with the subsequent capital raise and lower share price. While a weighted average formula will not protect investors from dilution to the same extent as full-ratchet, it will mitigate the effect. 

The typical formula used in weighted average anti-dilution provisions is as follows:

CP2 = CP1 x (A+B) / (A+C)

CP2 = Conversion price immediately after new issue of shares CP1 = Conversion price immediately before new issue of shares A =     Number of shares of common stock deemed outstanding immediately before new issue of shares  B =     Total consideration received by company with respect to new issue divided by CP1 C =     Number of new shares issued

Anti-dilution clauses exist to protect external investors and are often at the expense of founders, prior unprotected external investors or other shareholders. They are not ideal for the non-beneficiaries of the anti-dilution provisions, but the reality is that most serious and experienced investors will expect anti-dilution protections. 

Because anti-dilution provisions can cause limitations on a company’s future fundraising, they can be structured as a ‘pay-to-play’ provisions. This operates to protect investors from dilution only if they participate in subsequent rounds of capital raising. Investors that do not participate do not receive anti-dilution protections. This benefits both the company and the investors because it encourages all investors to continue to fund the company.

Under a more punitive variation of pay-to-play, an investor’s failure to participate in a future capital raise (whether dilutive or not) will cause that investor’s preferred shares to be converted into common shares. Consequentially, the investor will not only lose anti-dilution protection but also any liquidation preferences and other special rights attached to its preferred shares. 

Another alternative anti-dilution approach is the issuance of springing warrants to investors that participate in dilutive financing. Springing warrants allow investors that participate in a dilutive financing to purchase that number of additional shares of common stock allocable to them as calculated using the applicable anti-dilution formula for a nominal sum.

Founders of a company do not typically include complex anti-dilution provisions in an initial SHA (other than preemptive rights). Such terms are usually negotiated, if not dictated, by external investors and are dependent upon the relative bargaining power of the parties. They are not designed to protect founders but act as a safeguard for savvy investors. Anti-dilution provisions constitute one of the numerous inducements often necessary to satisfy investors and mitigate their risks in investing their money in a company that requires capital. 

Miscellaneous provisions

An experienced lawyer is indispensable for crafting a shareholders’ agreement that sufficiently meets the needs and objectives of shareholders and investors. Hill Dickinson, founded in 1810, has lawyers with decades of experience in dealing with a full range of corporate matters involving both conventional and complex investments and structures, venture capital, mergers and acquisitions, private equity, joint ventures, business sales, corporate reorganisations and capital markets offerings.

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Harmony in Ownership: A Guide to Shareholders’ Agreement

Chan Jia Ying

ARTICLE 8 August 2023

1. In today’s dynamic business landscape, ventures with multiple stakeholders are becoming increasingly common. Whether you are embarking on a startup journey or managing an established enterprise, a Shareholders’ Agreement is an indispensable tool that serves as a roadmap, outlining the rights, obligations, and responsibilities of all parties involved in the company, providing a framework for decision-making, conflict resolution, and protection of the stakeholders.

2.  Who needs a Shareholders’ Agreement

Shareholders’ Agreements are usually used in privately-held corporations such as private companies with multiple shareholders, startups and small businesses, family-owned businesses, joint ventures, partnerships, investment and funding situations.

3.  Parties Involved: Navigating the roles of the shareholders

A Shareholders’ Agreement can be entered into between: –

a. Some of the shareholders : The agreement can be signed by a subset of the shareholders who collectively hold a significant portion of the company’s shares. For example, between the majority shareholders and excluding all minority shareholders.

b. Certain classes of shareholders : In companies with multiple classes of shares (e.g., common shares, preferred shares, non-voting shares, redeemable shares), the agreement may be limited to specific classes of shareholders who have similar rights and interests.

c. Founders and key investors : Shareholders’ Agreements are often signed by the founders of the company and key investors who provide significant funding or expertise to the business.

d. Voting shareholders : Shareholders who possess voting rights may be party to the agreement to ensure alignment on important matters that require shareholder approval.

e. Certain stakeholders with special rights : The agreement may include parties who are not necessarily traditional shareholders but have a special role or rights in the company, such as directors or certain executives.

4.  Making the company a party to the Shareholders’ Agreement

Companies are not typically parties to Shareholders’ Agreements because the company is a separate legal entity from its shareholders, and such agreements are primarily designed to govern the relationship among the shareholders only. However, there are instances where the company is made a party to the Shareholders’ Agreement when specific circumstances or objectives warrant its inclusion. Examples of such instances are: –

a. where shareholders want to ensure that the company including its board of directors and management be bound by certain terms or obligations that are not explicitly provided for in the company’s constitution. By including the company as a party to the agreement, it would be bound by the terms and provides formal consent to the arrangements made among the shareholders.

Some of the common provisions that may be included in a Shareholders’ Agreement to bind the company include: –

i. Business Decisions:  Shareholders might want to or impose restrictions on specific business decisions, such as significant investments, mergers and acquisitions, or changes in core business activities. Including the company as a party can ensure that these decisions are made in accordance with the Shareholders’ Agreement.

ii. Dividend Policies:  The Shareholders’ Agreement may establish guidelines for dividend distribution or profit-sharing. By involving the company, the agreement can hold the company accountable for adhering to these policies. .

iii. Appointment of directors:  Shareholders may want to ensure certain shareholders have the right to appoint directors to the board. Involving the company in the agreement can make this arrangement legally binding.

iv. Management and Executive Compensation:  The agreement may include provisions pertaining to the compensation and benefits of key executives and management. Similarly, making the company a party can ensure that these provisions are followed.

v. Non-Compete and Confidentiality:  The Shareholders’ Agreement might contain clauses that restrict shareholders, including the company, from engaging in certain competitive activities or disclosing sensitive information.

b. Another common situation is where a minority shareholder who lacks control or a direct voice in the management of the company may seek to make the company, including its board of directors, a party to the Shareholders’ Agreement to put them on notice of certain terms or provisions that safeguard the rights and interests of minority shareholders, such as rights to information, protection from unfair treatment, or mechanisms for resolving disputes. The Shareholders’ Agreement can serve as a basis for negotiations and discussions with the majority shareholders or potential investors to secure additional rights or representation in the future.

However, this does not necessarily guarantee that a minority shareholder will have equal negotiating power or influence over the agreement’s content. Minority shareholders often face challenges in exerting significant influence in the decision-making process due to their limited ownership stake and voting power compared to majority shareholders.

5.  What happens when a new shareholder joins the company? Should a new Shareholders’ Agreement be signed?

If a Shareholders’ Agreement is already in place, it is still possible to bind the new shareholder to the existing agreement. This can be done by having the new shareholder to sign a deed of adherence, indicating his acceptance and adherence to the Shareholders’ Agreement. Alternatively, if the Shareholders’ Agreement allows for amendments, the parties may collectively agree to update the agreement to accommodate the new shareholder, subject to mutual consent. .

6.  Essential clauses in a Shareholders’ Agreement

The essential clauses in a Shareholders’ Agreement can vary based on the specific needs and circumstances of the shareholders and the company. Here is a list of core clauses that are commonly found in most Shareholders’ Agreements.

a. Share Ownership and Structure.  To outline the initial shareholding of each shareholder and may include details about future capital contributions and how new shares will be issued.

b.Voting Rights and Decision-Making.  This is to specify the voting rights of each shareholder, how important decisions will be made, and whether certain matters require a simple majority, supermajority, or unanimous consent.

c. Board of Directors and Management . This clause defines the composition of the board of directors, the process for appointing directors, their powers, and responsibilities.

d. Dividends and Distributions.  This outlines the company’s dividend policy and how profits will be distributed among shareholders.

e. Transfer of Shares and Pre-Emptive Rights . This is important to govern the transfer of shares between shareholders and may include rights of first refusal and pre-emptive rights.

f. Tag-Along and Drag-Along Rights . This clause protects minority shareholders (tag-along) and majority shareholders (drag-along) in the event of a sale of the company.

g. Anti-Dilution Protections . This clause protects existing shareholders from significant dilution in the event of new share issuance, such as during a fundraising round.

h. Reserved Matters . This section identifies certain critical decisions that require the approval of all shareholders, regardless of their ownership percentage.

i. Confidentiality and Non-Compete . It establishes confidentiality obligations for shareholders and may include non-compete clauses to prevent shareholders from engaging in competing businesses.

j. Deadlock Resolution . In case of an impasse or deadlock on important decisions, this clause provides a mechanism to resolve the disagreement and move forward.

k. Valuation Mechanism . This clause sets out the method for valuing the company or its shares, which can be crucial in situations like share buybacks or exit events.

l. Dispute Resolution . It outlines the procedures for resolving disputes among shareholders, such as through mediation, arbitration or court proceedings.

m. Termination and Exit . This section covers how the Shareholders’ Agreement can be terminated and what happens in the event of a shareholder’s exit, either voluntarily or involuntarily.

n. Non-Solicitation . This clause may prevent shareholders from poaching employees or customers of the company.

o.Governing Law and Jurisdiction.  It specifies the governing law under which the agreement is interpreted and the jurisdiction where disputes will be resolved.

7.  When is a good time to review the Shareholders’ Agreement?

To maintain corporate viability and adapt to evolving market conditions, it is essential to periodically review the agreement to ensure that it continues to align with the current needs and interests of all parties involved. Significant events such as changes in ownership structure, the addition of new shareholders, pursuit of major business decisions, strategic shifts or changes in the law can serve as triggers for a comprehensive review.

In conclusion, understanding the significance of a well-drafted Shareholders’ Agreement is paramount for any company’s smooth functioning and the protection of shareholders’ interests. A comprehensive and carefully constructed agreement can mitigate potential disputes, clarify rights and responsibilities, and foster a harmonious business relationship among shareholders.

Shareholder Agreement Template

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This shareholder agreement template is the perfect sample of how to outline how corporate shareholders will work with each other.

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Prepared by: ​ [Sender.FirstName] [Sender.LastName] ​ [Sender.Company] ​

THIS AGREEMENT, dated date is entered into amongst the following individuals constituting all of the current shareholders of [Sender.Company] (“Corporation”) :

​ [Shareholder 1.FirstName] [Shareholder 1.LastName] ​

​ [Shareholder 2.FirstName] [Shareholder 2.LastName] ​

​ [Shareholder 3.FirstName] [Shareholder 3.LastName] ​

​ [Shareholder 4.FirstName] [Shareholder 4.LastName] ​

( referred to collectively as “Shareholders” and individually as “Shareholder” ) and the Corporation.

1. Purpose of shareholder agreement

1.1 The Shareholders are all the shareholders of the Corporation, a state of incorporation corporation and are the sole Directors and Officers of the Corporation.

1.2 The Shareholders are entering into this Shareholder Agreement to provide for the management and control of the affairs of the Corporation, including management of the business, division of profits, disposition of shares, and distribution of assets on liquidation.

2. Shares subject to shareholder agreement

2.1 The Shareholders listed above own the number of shares of common stock, and approximate percentage of company ownership, as listed below:

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2.2 The shares listed above constitute all of the issued and outstanding capital stock of the Corporation. The Corporation acknowledges receipt from each Shareholder of the full consideration for the respective shares listed above, and each Shareholder acknowledges receipt of certificates representing his or her shares. All of the shares listed above and any additional shares of the capital stock of the Corporation that may be acquired by the Shareholders in the future shall be subject to this Agreement.

3. Management and control

3.1 board of directors.

Subject to termination in accordance with this Agreement, each Shareholder to this Agreement will be a director of the Corporation.

3.2 Authority of directors

During the term of this Agreement, the directors will, when appropriate, perform the following acts:

3.2.1 Determine in good faith the “current assets” of the Corporation for purposes of corporate distributions as required by the California Corporations Code;

3.2.2 Cause an quarterly report to be sent to the Shareholders not later than 30 days after the close of the quarter year, such quarterly report will be used to identify and approve any distributions in accordance with this Agreement;

3.2.3 After filing the Corporation’s original Articles of Incorporation, file any informational certificates that may be required by the California Secretary of State;

3.2.4 Cause the Corporation to maintain the books, records, and other documents required by California law;

3.2.5 Use best efforts to cause the business of the corporation in accordance with sound business practices.

3.3 President

Subject to the limitations in Section 3.7, the President of the Corporation will be its managing officer. The President will control the day-to-day operations of the business and affairs of the Corporation, including the following: president actions w/o approval.

3.4 Vice President

Subject to the limitations in Section 3.7, the Vice President of the Corporation will vice president duties.

3.5 Treasurer

Subject to the limitations in Section 3.7, the Treasurer of the Corporation will treasurer duties.

3.6 Secretary

Subject to the limitations in Section 3.7, the Secretary of the Corporation will secretary duties.

3.7 Limitations on actions of officers

The following actions shall not be made by any one Officer without the approval of all Officers of the Corporation: joint approval required actions.

3.8 Approval of all shareholders

Notwithstanding any contrary provisions in this Shareholder Agreement, the written consent of all of the Shareholders is required to approve the following actions:  mergers or consolidations involving the Corporation; amendment or repeal of the Articles of Incorporation of the Corporation; issuance of shares of any class or other rights relating to the issuance of shares of the Corporation; transfer of all, or substantially all, the assets of the Corporation; amendment of this Shareholder Agreement; or voluntary dissolution of the Corporation.

3.9 Employment of shareholders

Shareholders may be employed as officers of the Corporation, as long as they hold shares of stock of the Corporation, are active in its business, and, in a satisfactory manner, perform their duties and responsibilities as set forth in this Agreement, the Articles of Incorporation and the Bylaws of the Corporation. 

The title, duties, and the other terms of employment, including the annual salary, will be memorialized in a separate document and must be both approved, and only may be subsequently altered, only by the unanimous written consent of the Shareholders.

4. Noncompetition and trade secrets

4.1 noncompetition.

Each Shareholder agrees that as long as he or she is the owner, or in control of, any of the Corporation’s shares, the Shareholder will not be employed, concerned, or financially interested, either directly or indirectly, in the same or a similar business as that conducted by the Corporation, or compete with the Corporation.

4.2 Trade secrets

Each Shareholder acknowledges that the customer lists, trade secrets, processes, methods, and technical information of the Corporation and any other matters designated by the President or by the written consent of all Shareholders are valuable assets.

Unless he or she obtains the written consent of each of the other Shareholders, each Shareholder agrees never to disclose to any individual or organization, except in authorized connection with the business of the Corporation, any customer list, or any name on that list, or any trade secret, process, or other matter referred to in this paragraph while the Shareholder holds, or has the control of, any shares of the Corporation, or at any later time.

5. Distributions of income and losses

5.1 determination of net income and loss.

The net profits or net losses of the Corporation for each fiscal year will be determined on an accrual basis in accordance with generally accepted principles of accounting.

5.2 Retaining net income

The Corporation will retainretained income threshold ($retained income dollar amount) of its net income, plus any additional amount the Shareholders reasonably believe necessary to meet financial needs of the Corporation, including, but not limited to the development or expansion of its business.

5.3 Regular distributions of net income

Subject to any retained earnings and to the statutory requirements related to corporate distributions, the net income of the Corporation may be distributed quarterly to the Shareholders in proportion to the number of shares of the Corporation owned by them.  Such distributions shall be approved by all Shareholders. Shareholders may elect to not take a distribution, but instead offer the moneys as a loan to the Corporation.

6. Shareholder loans to the corporation

6.1 loan conditions.

A Shareholder may issue a loan to the Corporation upon approval by all Shareholders and only under the following conditions, unless otherwise agreed upon.  shareholder loan conditions.

6.2 Repayment

Repayment of Shareholder loans by the Corporation shall occur when the Shareholders agree that there are enough corporate funds to pay the loan.  Loans to Shareholders shall be paid in order of priority with the oldest loan being paid first, unless the Shareholder waives such write to first payment.

7. Dissolution of corporation

7.1 unanimous consent required.

All Shareholders must consent to voluntary dissolution.

7.2 Procedures for dissolution

On commencement of dissolution proceedings (either by election of all Shareholders or otherwise) , the Corporation will cease to carry on business except as necessary to wind up its business and distribute its assets. The President, or any Shareholder or Shareholders appointed by the President, will perform the following acts, as necessary, to wind up the affairs of the Corporation:

•‎ Continue the business as necessary for the winding up of the affairs of the Corporation;

•‎ Carry out contracts and collect, pay, compromise, and settle debts and claims for or against the Corporation (including participating in litigation, whether as plaintiff or defendant relating to the same);

•‎ Sell at public or private sale, exchange, convey, or otherwise dispose of all or any part of the assets of the Corporation for cash in an amount considered reasonable by the President, or his or her appointee(s);

•‎ Make contracts and take any steps in the name of the Corporation that are necessary or convenient in order to wind up the affairs of the Corporation; and/or

•‎ Employ agents and attorneys to liquidate and wind up the affairs of the Corporation.

7.3 Distribution of assets

As part of the dissolution process, the President, or the President’s appointee(s), will apply the assets of the Corporation in the following order:

•‎ To all debts and liabilities of the Corporation in accordance with the law, including the expenses of dissolution and liquidation, but excluding any Shareholder loans;

•‎ To all Shareholder loans, with unpaid interest;

•‎ To undistributed net profits of the Corporation;

•‎ To repayment of the purchase price of the shares of the Corporation actually paid by each Shareholder; and, finally, should any assets remain;

•‎ To the Shareholders in proportion to the number of shares of the Corporation held by each.

8. Transfer of shares

8.1 shares acquired for investment.

Each of the Shareholders acknowledges and represents that he or she has obtained and accepted his or her shares in good faith, for investment and for his or her own account, and not with a view to distribution or resale.

8.2 Restrictions on transfer

To accomplish the purposes of this Agreement, any transfer, sale, assignment, or encumbrance of any of the shares of the Corporation, other than according to the terms of this Shareholder Agreement is void.

8.3 Buy-sell upon death of shareholde

Upon the death of a Shareholder, the Corporation shall purchase, and the deceased Shareholder’s estate or successor or successors in interest (the ”Deceased Shareholder”) , shall sell, all the Corporation’s stock presently owned by such Stockholder.  This sale will be made within sixty (60) days after the appointment of a legal representative for the Deceased Shareholder’s estate.

8.4 Buy-sell for other reasons

Shareholder may voluntarily sell all the Corporation’s stock presently owned by such Shareholder (“Departing Shareholder”) .  Any and all sales hereunder with respect to the Departing Shareholder shall be made within sixty (60) days after written notice of intent to sell served on the Corporation and the remaining Shareholders.

8.5 Right of first refusal

In the event of mandatory or voluntary buy-sell under this Section, the non-departing or surviving Shareholder shall have the right of first refusal to purchase all shares that would otherwise be repurchased by the Corporation at the purchase price set forth above.  To exercise this right, the non-departing or surviving Shareholders provide written notice to the Corporation no later than ten (10) days prior to the effective date of sale.

9. Dispute resolution

9.1. Any dispute relating to this Shareholder Agreement, or arising out of or relating to operations of the Corporation, or the rights or obligations of the Shareholders, shall be settled by:  options.

10. Miscellaneous provisions

10.1 necessary acts.

All parties to this Shareholder Agreement will perform any acts, including executing any documents, that may be reasonably necessary to fully carry out the provisions and intent of this Agreement.

10.2 Notices

All notices, demands, requests, or other communications required or permitted by this Shareholder Agreement (other than routine communication relative to business operations) will be in writing sent to the following:

​ [Sender.Company] ​ [Sender.StreetAddress] [Sender.City] [Sender.State] [Sender.PostalCode] ​

​ [Shareholder 1.FirstName] [Shareholder 1.LastName] ​ [Shareholder 1.StreetAddress] [Shareholder 1.City] [Shareholder 1.State] [Shareholder 1.PostalCode] ​

​ [Shareholder 2.FirstName] [Shareholder 2.LastName] ​ [Shareholder 2.StreetAddress] [Shareholder 2.City] [Shareholder 2.State] [Shareholder 2.PostalCode] ​

​ [Shareholder 3.FirstName] [Shareholder 3.LastName] ​ [Shareholder 3.StreetAddress] [Shareholder 3.City] [Shareholder 3.State] [Shareholder 3.PostalCode] ​

​ [Shareholder 4.FirstName] [Shareholder 4.LastName] ​ [Shareholder 4.StreetAddress] [Shareholder 4.City] [Shareholder 4.State] [Shareholder 4.PostalCode] ​

10.3 Attorneys’ fees

In the event of any litigation concerning this Shareholder, the prevailing party shall be entitled, in addition to any other relief that may be granted, to reasonable attorneys’ fees.

10.4 Binding on successors and assigns

This Agreement will be binding on the parties to the Agreement and on each of their heirs, executors, administrators, successors, and assigns.

10.5 Severability

If any provision is unenforceable or invalid for any reason, the remaining provisions shall be unaffected by such a holding.

10.6 Governing law

This Agreement shall be construed according to and governed by the laws of the State of California.

10.7 Entire agreement

This document constitutes the entire Shareholder Agreement of the Corporation and correctly sets forth the rights, duties, and obligations of each Shareholder and of each Shareholder to the other. Any modifications must be in writing and approved by all Shareholders.

​ [Sender.FirstName] [Sender.LastName] ​

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Shareholder Agreement

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Your Shareholder Agreement

SHAREHOLDER AGREEMENT

THIS SHAREHOLDER AGREEMENT made this ________ day of ________________, ________,

_________________________ of _________________________ (the "Corporation")

OF THE FIRST PART

BACKGROUND:

• The Corporation is incorporated under the California Corporations Code (the "Act").
• The Act permits the Shareholders to enter into a shareholder agreement in writing to restrict the powers of the directors of the Corporation to manage the business and affairs of the Corporation and to confer certain of the powers normally possessed by the directors of the Corporation on the Shareholders.
• The Shareholders have decided to enter into this agreement (the "Agreement") to govern their respective interests, obligations, liabilities, ownership and rights in the Corporation and to provide for the better government of the Corporation.
• All of the Shareholders have executed this Agreement.
• The Corporation has executed this Agreement for the purpose of acknowledging notice of this Agreement and, where permitted by law, for the purpose of agreeing to give effect to the terms of this Agreement.

IN CONSIDERATION OF the premises and mutual covenants and agreements in this Agreement, the sufficiency of which is hereby acknowledged, the parties agree as follows:

• Interpretation
• "Articles" means the Corporation's Articles of Incorporation or Articles of Amalgamation, as the case may be;
• "Board" means the board of directors of the Corporation;
• "Business Day" means a day other than a Saturday or Sunday or statutory holiday;
• "By-laws" means the by-laws of the Corporation as of the date of this Agreement and as may be amended from time to time;
• "Fair Market Value" means the fair market value as determined by this Agreement;
• "Financial Statements" means the financial statements of the Corporation, prepared in accordance with generally accepted accounting principles;
• "Party" or "Parties" means all of the Shareholders and the Corporation;
• "Share" or "Shares" refers to one or more shares in the capital of the Corporation;
• "Shareholder" means any one of the Shareholders who is or later becomes a Shareholder in the Corporation;
• "Shareholders" mean any two or more of the Shareholders who are or later become Shareholders in the Corporation.
• This Agreement restricts the Board's power to manage and supervise the Corporation to the extent necessary to effect the Shareholders' objectives as such objectives are set out in this Agreement and transfers such powers to the Shareholders. The Shareholders acknowledge that to the extent the Board's powers are restricted and transferred to the Shareholders, the obligations and liabilities of the Board, and the individual directors thereon, are also transferred to the Shareholders.
• By-laws and Articles
• The By-laws will be read as being subject to the provisions of this Agreement. The By-laws will not be amended or repealed except by written Agreement of all of the Shareholders.
• The Articles will be read as being subject to the provisions of this Agreement. The Articles will not be amended or repealed except by written Agreement of all of the Shareholders.
• The Corporation warrants that it has the necessary corporate power and authority to enter into this Agreement and to perform its obligations under this Agreement.
• Each Shareholder warrants that the Shareholder is not prevented by reason of law or any other contractual agreement from entering into this Agreement.
• Management of the Corporation
• The Board will consist of a number of directors equal to the number of Shareholders, and each Shareholder will be entitled to appoint one person to the Board and will have the sole right to remove and replace such appointee.
• Capital Requirements of the Corporation
• If all of the Shareholders determine by written resolution that the Corporation requires additional funds to meet the Corporation's obligations to its creditors or to achieve the purpose for which the Corporation was incorporated the Shareholders will provide the Corporation with an interest-free Shareholder loan (the "Loan") in an amount that is sufficient to enable the Corporation to meet such obligations or objectives, as the case may be. Each Shareholder will contribute to the Loan on a pro rata basis. The Shareholders may exempt any Shareholder from contributing to the Loan, but if less than all of the Shareholders contribute to the Loan, the Shareholders who contribute to the Loan will be entitled to interest at a reasonable commercial rate.
• Pre-Emptive Rights
• The Shares will be offered first to the Shareholders of the class of Shares being issued (the "First Offer") on a pro rata basis.
• Any Shares remaining after the First Offer will be offered on an equal basis to the other Shareholders of that class (the "Second Offer") for not less than the subscription price specified in the First Offer and on terms not more favorable than those in the First Offer.
• Any Shares remaining after the Second Offer will be offered on an equal basis to all Shareholders in the Corporation (the "Third Offer") for not less than the subscription price specified in the Second Offer and on terms not more favorable than those in the First Offer.
• Any Shares remaining after the Third Offer may be offered to any person or persons (the "Final Offer") for not less than the subscription price specified in the Third Offer and on terms not more favorable than those in the First Offer.
• the subscription price at which the Shares are offered;
• the date by which the Offer must be accepted, which will be not less than 10 Business Days from the date on which the Offer is made;
• the terms of the Offer; and
• the closing date for the transaction, which will be between 30 and 90 Business Days from the date on which the Offer is accepted.
• If the Offer is not accepted within the time period specified for accepting the Offer, the Offer will be deemed to be declined.
• the subscriber is a party to this Agreement; or
• the subscriber agrees to be bound by and to become a party to this Agreement and gives a written and legally binding undertaking to be bound by and become a party to this Agreement.
• Restrictions on Transfer or other Disposal of Interest
• Shareholders will not and will not agree to directly or indirectly sell, assign, transfer, give, pledge, hypothecate or otherwise dispose of or in any other way encumber any Shares or any interest in any Shares and will not create any security interest in or grant any option with respect to any Shares or any interest in any Shares, except in accordance with the express provisions of this Agreement or except with the prior written approval of all of the Shareholders.
• Death or Incapacity of Shareholder
• If a Shareholder dies or becomes incapable (the "Incapacitated Shareholder") of performing duties that the Shareholder is required to perform as a director or officer or as otherwise imposed by this Agreement by reason of sickness, injury, mental or physical incapacity ("Incapacity") and it appears as though the Incapacitated Shareholder will not recover so as to be able to perform those duties within 90 days of the Incapacity, the other Shareholders will purchase all of the Incapacitated Shareholder's Shares at Fair Market Value as soon as practicable but not later than 6 months after the Incapacity. If there is more than one other Shareholder purchasing the Incapacitated Shareholder's Shares, each Shareholder will, subject to the prior written agreement of the other purchasing Shareholders, purchase an equal amount of the Incapacitated Shareholder's Shares. Each Shareholder may obtain insurance on the life of any other Shareholder in an amount not exceeding the estimated Fair Market Value of that Shareholder's Shares. The proceeds from any such life insurance will be used for the sole purpose of purchasing a deceased Shareholder's Shares.
• Dispute Resolution
• In the event a dispute arises between two or more Shareholders, the Shareholders will attempt to resolve the dispute through friendly consultation. If the dispute is not resolved within a reasonable period, then any or all outstanding issues may be submitted to mediation in accordance with any statutory rules of mediation. If mediation is not successful in resolving the entire dispute or is unavailable, any outstanding issues will be submitted to final and binding arbitration in accordance with the laws of the State of California. The arbitrator's award will be final, and judgment may be entered upon it by any court having jurisdiction within the State of California.
• The dispute resolution process may be commenced by any of the Shareholders by the delivery of written notice (the "Notice of Dispute") to all other Shareholders. The notice will specify the dispute to be arbitrated, the issues of fact and law to be determined and the proposed arbitrator.
• Any Shareholder may object to a proposed mediator and propose an alternate by delivering a written notice of objection to all other Shareholders within 15 Business Days of receiving the Notice of Dispute. All of the proposed mediators will jointly appoint a mediator. If the proposed mediators are unable to agree upon a mediator, any party to the dispute may apply to the Court for the appointment of a mediator.
• Any Shareholder may object to a proposed arbitrator and propose an alternate by delivering a written notice of objection to all other Shareholders within 15 Business Days of receiving the Notice of Dispute. All of the proposed arbitrators will jointly appoint an arbitrator. If the proposed arbitrators are unable to agree upon an arbitrator, any party to the dispute may apply to the Court for the appointment of an arbitrator.
• If no Shareholder objects by written notice to the proposed mediator or arbitrator within 15 Business Days of receiving the Notice of Dispute, the proposed mediator or arbitrator will be presumed acceptable.
• Every mediator and arbitrator, and all proposed mediators and arbitrators will be at arm's-length from every Party to this Agreement and will not have any interest in the dispute.
• The mediator or arbitrator will, subject to applicable legislation, determine the procedure for hearing the dispute but will give written reasons for material findings of fact and a written decision.
• The mediator or arbitrator will determine the liability among the parties to the dispute for the cost of the dispute resolution process and for the payment of the mediator or arbitrator.
• Shot Gun Provision
• the manner in which the affairs of the Corporation are to be conducted;
• the business in which the Corporation should engage; or
• any other matter where the disagreement is of such a nature that it is likely to prejudice the operations or profitability of the Corporation

and if the Material Dispute cannot be resolved within a reasonable period or through the mediation and arbitration provisions included in this Agreement, then any Shareholder (the "Initiating Shareholder") may initiate a forced buy or sell agreement (the "Shot Gun Provision").

• sell all of the Shares owned by the Initiating Shareholder; or
• purchase all of the Shares owned by the Offeree.
• purchase the Initiating Shareholder's Shares at the Price; or
• sell the Offeree's Shares at the Price.
• If the Offeree does not respond to the Shot Gun Offer before 5 p.m. on the 15th Business Day after the date on which the Shot Gun Offer was received, the Offeree will be deemed to have agreed to sell the Offeree's Shares to the Initiating Shareholder at the Price.
• If the Offeree elects to purchase the Initiating Shareholder's Shares, the Offeree will tender a certified check for the Price within 10 Business Days of notifying the Initiating Shareholder that the Offeree has elected to purchase the Initiating Shareholder's Shares, and the Initiating Shareholder will transfer or cause to be transferred to the Offeree all of the Initiating Shareholder's Shares on receipt of the Price.
• If the Offeree elects or is deemed to elect to sell the Offeree's Shares to the Initiating Shareholder, the Initiating Shareholder will tender a certified check for the Price within 10 Business Days of either the date on which the Initiating Shareholder receives notice that the Offeree has elected to sell the Offeree's Shares or the date on which the Offeree is deemed to have elected to sell the Offeree's Shares to the Initiating Shareholder, and the Offeree will transfer or cause to be transferred to the Initiating Shareholder all of the Offeree's Shares on receipt of the Price.
• Failure to make a payment required by this Shot Gun Provision or failure to transfer the Shares as required by this Shot Gun Provision will be deemed to be a breach of contract and the non-defaulting party will, in addition to any other remedies available by statute or at law or equity, be entitled to and may elect to, by written notice within 30 Business Days of the default, purchase the defaulting party's Shares at 75% of the Price.
• If there are more than two Shareholders to this Agreement, the Initiating Shareholder may make a Shot Gun Offer to one of the other Shareholders, and the procedure in this Shot Gun Provision will apply as if there were only two Shareholders. The Initiating Shareholder may also make a Shotgun Offer to the other Shareholders as a group, and the other Shareholders will either come to an agreement among themselves to buy the Initiating Shareholder's Shares or will, as a group, elect to sell all of their Shares to the Initiating Shareholder, and the procedure in this clause will apply.
• Right of First Refusal
• the Shares are first offered at not more than Fair Market Value to the Shareholders of the class of Shares being sold on a pro rata basis ("Offer One"); and
• the Shares remaining after Offer One are offered to all other Shareholders on an equal basis ("Offer Two") for not less than the price specified in Offer One and on terms not more favorable than those in Offer One.
• The Shares remaining after Offer Two may be offered to any person or entity (the "Third Party Offer") for a period of 180 days from the date on which Offer Two was made for not less than the price specified in Offer Two and on terms not more favorable than those in Offer One.
• the price at which the Shares are offered;
• the date by which time the Share Offer must be accepted, which will be not less than 10 Business Days from the date on which the Share Offer is made;
• the terms of the Share Offer; and
• the closing date for the sale of the Shares, which will be between 30 and 90 Business Days from the date on which the Share Offer is accepted.
• Any Share Offer not accepted within the time period specified for accepting the Share Offer will be deemed to be declined.
• Tag-Along Provisions
• The Third Party will offer to purchase any Remaining Shareholder's Shares. This offer will remain open for a period of 90 days from the date on which the Third Party first acquires Shares in the Corporation.
• If the Remaining Shareholder is selling Shares of the same class and series as the Shares purchased by the Third Party, the price will be the same.
• If the Remaining Shareholder is selling Shares of a class or series other than the Shares purchased by the Third Party, the price will be the Fair Market Value of the Shares. If the Fair Market Value of the Shares is unknown, the Third Party will bear the cost of determining the Fair Market Value of the Shares.
• The Third Party will purchase the Remaining Shareholder's Shares on terms that are substantially similar to and not less favorable to the Remaining Shareholder than those in the transaction between the Selling Shareholder and the Third Party.
• The Fair Market Value of the Shares will be set by the Shareholders on an annual basis and will be communicated by way of a Shareholders Resolution declaring that the Shareholders agree that the Fair Market Value of each Share of each class and series is a specified amount.
• ____________________
• The Shareholder or Shareholders desiring the valuation will give written notice to all other Shareholders that a valuation is required (the "Valuation Notice").
• The Valuation Notice will specify the reason for the valuation and will name three (3) firms or persons that specialize in and have substantial experience in business valuation that are at arm's-length from all Parties (the "Potential Valuators").
• The Shareholders receiving the Valuation Notice will select one of the Potential Valuator's to act as the valuator (the "Valuator").
• The Valuator will value the Shares in accordance with generally accepted accounting principles in the jurisdiction in which the Corporation is incorporated or continued.
• The Shareholders will share the cost of valuating the Shares, and each Shareholder will pay an equal amount of the cost of valuation.
• Subject to corporate law solvency requirements and to the extent permitted by law and after payment of any Shareholder loans and after establishing sufficient reserves for the normal operation of the Corporation's business activities and debt serving requirements, all of the Corporation's profits will be distributed by way of dividend. Dividends will be distributed annually.
• Conflict of Opportunities and Non-Competition
• Each Shareholder agrees that any business opportunity that comes to the attention of the Shareholder while the Shareholder is a Shareholder, director, officer or employee of the Corporation and that is similar to or that relates to the current or anticipated business opportunities of the Corporation or that arises out the Shareholder's connection with the Corporation, belongs to the Corporation.
• undertake, plan, organize or be involved in any way with any business or any business activity that competes with the current or anticipated business of the Corporation in the geographic area in which the Corporation carries on its usual business; or
• divert or attempt to divert from the Corporation any business the Corporation enjoyed, solicited, or attempted to solicit from its customers, prior to the Shareholder ceasing to be a Shareholder.
• Each Shareholder agrees that for so long as the Shareholder is a Shareholder, director, officer or employee of the Corporation, the Shareholder will not engage or participate in any other business activities that conflict with the best interests of the Corporation.
• Non-Solicitation
• Each Shareholder agrees that while a Shareholder, director, officer or employee of the Corporation and for a period of 6 months after ceasing to be a Shareholder, director, officer or employee of the Corporation, the Shareholder will not in any way, directly or indirectly, induce any Shareholder, director, officer or employee of the Corporation to leave their position with the Corporation or to compete in any way with the Corporation and will not interfere with the Corporation's relationship with its other Shareholders, directors, officers or employees. Such enticement or interference would be harmful and damaging to the Shareholders and to the Corporation.
• Notice of this Agreement on Share Certificates
• The shares represented by this certificate are subject to the provisions of a shareholder agreement, made the ________ day of ________________, ________, which restricts the right to sell, transfer or encumber any shares in the Corporation, including the shares represented by this certificate. Notice of the said agreement is hereby given. A copy of the said agreement may be obtained by sending a written request to the Board of Directors for the Corporation.
• Effective Date and Term
• This Agreement will come into effect on the date of its execution.
• the date specified in a written agreement, signed by all of the Shareholders, terminating this Agreement; or
• the bankruptcy, winding-up or dissolution of the Corporation.
• Address for Notice
• _________________________ _________________________
• Any Shareholder may, on written notice to all other Shareholders and the Corporation, change the Shareholder's address for notice under this Agreement. If the Corporation's registered address changes, the Corporation may, on written notice to all Shareholders, change its address for notice under this Agreement.
• Severability
• If there is a conflict between any provision of this Agreement and the Act, the Act will prevail and this Agreement will be amended in order to comply with the Act. Further, any provisions required by the Act are incorporated into this Agreement.
• If there is a conflict between any provision of this Agreement and any form of Agreement prescribed by the Act, that prescribed form will prevail and such provisions of the Agreement will be amended or deleted as necessary in order to comply with that prescribed form. Further, any provisions that are required by that prescribed form are incorporated into this Agreement.
• In the event that any of the provisions of this Agreement are held to be invalid or unenforceable in whole or in part, those provisions to the extent enforceable and all other provisions shall nevertheless continue to be valid and enforceable as though the invalid or unenforceable parts had not been included in this Agreement and the remaining provisions had been executed by the Parties subsequent to the expungement of the invalid provision.
• General Provisions
• This Agreement will not be amended or modified except by the written agreement of all the Shareholders. All Shareholders, without the consent of the Corporation, may modify, amend or rescind this Agreement.
• This Agreement constitutes the entire agreement between the Parties and supersedes any previous agreement or representation with respect to the matters set forth in this Agreement, and there are no conditions, warranties, representations, agreements, express or implied, relating to such matters.
• This Agreement will be construed in accordance with and governed by the laws of the State of California.
• Headings are inserted for the convenience of the Parties and for the purpose of interpreting this Agreement. Words in the singular mean and include the plural and vice versa. Words in the masculine mean and include the feminine and vice versa. Words in the neuter mean and include the masculine and feminine and vice versa.
• This Agreement will inure to the benefit of and be binding upon the respective heirs, executors, administrators, successors and assigns, as the case may be, of the Parties.
• This Agreement may be executed in counterparts. Facsimile signatures are binding and are considered to be original signatures.
• Time is of the essence in this Agreement.
• The Parties will do all acts and things and execute all documents that are reasonably necessary or advantageous to enforce this Agreement according to its tenor and intent and each Party will bear that Party's own expenses in connection with the same.
• All dollar amounts in this Agreement refer to US Dollars, and all payments required to be paid under this Agreement will be paid in US Dollars unless the Parties agree otherwise.
• No Party will be liable in damages or have the right to terminate this Agreement for any delay or default in performance if such delay or default is caused by conditions beyond that Party's control including, but not limited to acts of God or government restrictions, wars, insurrections, natural disasters, such as earthquakes, hurricanes or floods and/or any other cause beyond the reasonable control of the Party whose performance is affected.

IN WITNESS WHEREOF the Parties have executed this Agreement on this ________ day of ________________, ________.

Last Updated February 28, 2024

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What is a Shareholder Agreement?

A Shareholder Agreement, also called a stockholder agreement, is a legally binding contract between a corporation's shareholders that outlines their rights, responsibilities, and obligations. It also includes information about management and how the company should be operated.

The specific contents of an agreement vary depending on the corporation and its shareholders, but it typically addresses the following:

• Shareholder rights and responsibilities
• Share ownership and valuation
• Management of finances, business, assets, capital, and shares (e.g., the handling of dividend payouts)
• Rules for issuing new shares and restrictions on share transfers
• Actions to take upon the incapacitation or death of a shareholder
• Conflicts of interest rules, such as non-compete or non-solicitation clauses
• Methods for dispute resolution , such as mediation or arbitration 

What is a shareholder?

A shareholder is a part owner of a company. An individual, company, or institution can be a shareholder. They become one by owning at least one share of stock in a company.

If the stock increases in value, the shareholder makes a profit on their investment into a company. However, if the company performs poorly and the stock’s value drops, the shareholder can potentially lose money.

A company's shareholders will usually create a Shareholder Agreement to establish the rules governing the shareholders' relationships with the company and one another.

Why should I create a Shareholder Agreement?

A Shareholder Agreement is valuable for shareholders because it addresses crucial issues that help keep the company running smoothly. If there are future disputes between the shareholders, they can refer to the agreement as a guide for resolving the problem.

It’s recommended that the shareholders create a Shareholder Agreement before business begins. Doing so helps ensure shareholders agree and understand their rights and obligations to the company.

What happens if there’s no Shareholder Agreement?

When a company doesn't have a Shareholder Agreement, it significantly increases the likelihood of conflict between the shareholders. This is because there aren't rules to guide their acts, determine how they'll make decisions as a group, or find resolutions to disputes.

This is especially the case with smaller companies where two shareholders each hold 50% of the shares. If they disagree on how to proceed, it can create a deadlock. 

Shareholder Agreements can also regulate the sale of shares, so they aren't sold to a third party before the current shareholders can buy them.

What are shareholder rights?

As part-owners of a company, shareholders have certain rights. These rights typically include the following:

• Appointing or dismissing directors (through a shareholder vote)
• Attending shareholder meetings
• Making important decisions regarding the company
• Receiving dividends
• Receiving reports about the company
• Reviewing company records
• Selling or transferring shares

Shareholder rights also include how shares are treated when a shareholder wishes to exit the company. Some standard clauses that handle how shares are transferred under such circumstances include:

• Right of first refusal clause

This clause comes into effect when a shareholder wishes to sell their shares . Right of first refusal means they must first offer to sell their shares to other shareholders at a fair value. If the shareholders can’t purchase them, the selling shareholder can offer them to a third party.

• Shotgun clause

A shotgun exit provision, also called a buy-sell agreement, may be used in the event of a shareholder dispute. It specifies that one shareholder can offer to buy another shareholder's shares. The shareholder who was approached with the offer can then either agree to be bought out or buy out the first shareholder's shares at the offered price.

• Tag-along clause

A tag-along clause typically applies to majority shareholders who intend to sell a significant portion of their shares. It can also apply to a proposed sale that will result in a third party becoming a majority shareholder. The clause protects minority shareholders because a buyer must purchase their shares at the same price as the shares owned by a majority shareholder (thus agreeing to buy all the shares).

What is a share valuation clause?

A share valuation clause establishes how shareholders determine the value of a company’s shares. Valuation occurs when shareholders want to sell or transfer their shares to another shareholder or after they pass away.

Without establishing a method for share valuation, companies may experience unnecessary uncertainty or disagreement regarding the value of shares.

Share valuation clauses are sometimes called stock valuation clauses.

What's the difference between a Partnership Agreement and a Shareholder Agreement?

Shareholder Agreements and Partnership Agreements are similar but used under different circumstances.

A Partnership Agreement is used between two or more partners in a for-profit business partnership , whereas shareholders in a corporation use a Shareholder Agreement.

Can a Shareholder Agreement override Articles of Incorporation?

No, a Shareholder Agreement does not override a company's Articles of Incorporation . However, the shareholders and directors can amend the Articles to align more accurately with the Shareholder Agreement.

How do I create a Shareholder Agreement?

You can easily create a Shareholder Agreement by completing LawDepot’s questionnaire. Using our template ensures you complete the following necessary steps.

Step 1: Provide details about the corporation

Start your Shareholder Agreement by providing the corporation’s name, address, and state in which it’s located.

Step 2: Include details about the shareholders

Your agreement needs to specify each shareholder's name, address, and whether they're an individual or a corporation.

Step 3: State if the Shareholder Agreement will include warranties

State whether the corporation will provide a list of its current shareholders. Doing so confirms for the shareholders how many shares have been issued and who owns those shares.

If the corporation provides a list of shareholders, specify whether each shareholder will warrant that they are the sole beneficial owner of their shares. When shareholders warrant that they're the beneficial owner of their shares, no other person is interested in them, nor are they held in trust for someone else.

Step 4: Provide details about share ownership

In your agreement, you must also state the class of shares (e.g., Class "A" Voting, Class "B" Non-Voting, etc.) each shareholder owns, as well as how many shares they own.

Step 5: Determine how the corporation’s directors will be appointed

Include how the corporation will appoint its directors. Typically, the shareholders will elect directors or have each shareholder appoint one director. 

However, there are many other ways to go about choosing directors. For example, the shareholders may decide that the corporation’s president will select them.

When selecting directors for a corporation, it's essential to have fair representation for both majority and minority shareholders.

It should also be noted that all directors must act in the corporation's best interest, no matter how they were elected.

Alternate directors

In case of a vacancy, you can also appoint alternate directors that will step in. If you wish to do this, include the names of each alternate director in your Shareholder Agreement. 

Step 6: Specify the corporation’s officers

A corporation's officers include the President, Vice-President, Treasurer, and Secretary.

Specifying the corporation's officers may prevent subsequent shareholders from firing your officers even if they acquire a majority share or control of the board of directors. This may provide a level of managerial consistency to the company.

However, for the same reason, specifying the officers may also prevent the company from attracting new investors who want to install their own management team to run the corporation.

Step 7: State which decisions are subject to shareholder approval

You can use your Shareholder Agreement to specify which decisions are subject to the shareholders' approval.

The directors will generally make most of the decisions affecting the company's management. However, selecting specific management issues that will be decided by shareholders in the Shareholder Agreement preserves the right of the shareholders to maintain control over issues vital to the corporation.

Some areas that shareholders may want to maintain decision-making control over include:

• Business and finance (e.g., selecting a bank for the corporation)
• Capital and assets (e.g., disposal of assets valued above a certain amount)
• Shares and new share issues (e.g., issuing new shares for non-monetary consideration)

Step 8: Determine the duration of the Shareholder Agreement

Determine when the Shareholder Agreement will take effect and when it will end. The agreement can terminate when all shareholders agree to end it or on a specific date.

Having an end date ensures that the shareholders can cancel the agreement regardless of all the parties agreeing. This is a beneficial arrangement if a demanding shareholder refuses to terminate the agreement despite termination being in the corporation's best interest.

If you choose a specific end date, you can always renew the agreement before it expires. If your agreement doesn't have an end date, you'll typically need a Termination Agreement to cancel it formally.

Step 9: Outline what happens if the corporation needs additional funds

Use your Shareholder Agreement to outline what will happen if the corporation ever needs additional funds. Specify whether the shareholders will buy more shares or provide loans to the corporation .

Also, state who will determine that the corporation needs additional funds. For example, the decision can require the approval of a certain percentage of the shareholders or the board of directors.

Step 10: State whether existing shareholders will have preemptive rights

Preemptive rights give existing shareholders the right to buy any newly issued shares from the corporation before offering them to outside parties. This arrangement protects existing shareholders by allowing them to retain their company ownership percentage.

Some disadvantages of preemptive rights are that they may cause long delays in the sale of shares and that they may discourage sophisticated institutional investors from investing because the third-party investors may get a smaller proportionate share of the corporation than they might want if the preemptive rights are exercised.

Step 11: Specify whether shareholders are prohibited from selling shares

Specify in your agreement whether shareholders are prohibited from selling their shares. This includes the sale or transfer of any interest in the shares.

Step 12: Outline the valuation of shares

If you wish to include a valuation clause, use your agreement to outline who will set the value of the shares.

If you decide that the shareholders will set the value annually, you can also specify the current value of the shares in each class and what happens if the shareholders fail to set a value.

If the shareholders don't set a value, the corporation can pay a professional valuator to set the value of the shares. Having the shareholders place value on the shares may lead to a large over-or-under valuation. Either mistake can be detrimental to the company and all affected shareholders.

Step 13: Decide if the corporation will pay dividends

If the corporation will pay dividends, specify the following:

• What percentage of profits will be paid as dividends
• How often will dividends be distributed (e.g., annually, bi-annually, or quarterly)
• Any additional provisions for dividend distribution

Step 14: Specify what happens if a shareholder dies or becomes incapacitated 

Your agreement should specify what happens to a shareholder’s stock in the corporation if they die or become incapacitated. For example, your Shareholder Agreement can give the other shareholders the option to purchase their shares , or it may force the remaining shareholders to purchase their shares.

Step 15: Include non-compete and non-solicitation clauses (if applicable)

Your Shareholder Agreement can include non-compete and non-solicitation clauses that last anywhere from six months to five years.

Non-compete clause

A non-compete clause prohibits shareholders from competing with the corporation while they’re owners in the corporation and for a specific period after they have left the corporation.

In a small corporation, customers deal closely with the shareholder. A non-compete clause prevents an influential shareholder or former shareholder from attracting customers away from the corporation.

A shareholder that leaves the corporation may also have confidential information that they can use to compete against the corporation.

Non-solicitation clause

A non-solicitation clause prevents shareholders or former shareholders from inducing other shareholders, directors, officers, or employees to leave the corporation or to compete against it.

This clause prevents an influential shareholder from stealing key employees.

Step 16: Determine how the shareholders will resolve disputes

Specify whether the shareholders will use any of the following to resolve disputes: 

• Mediation and arbitration

Mediation is a process by which a mediator assists the conflicting parties in negotiating an agreement regarding the issue leading to conflict. Arbitration is when the conflicting parties present their conflict to a neutral third party who decides how to resolve the issue.

Shareholders should use a mediator or arbitrator when they are deadlocked over an issue. Mediation and arbitration are superior processes when a long-term relationship is involved, and the survival of the business relationship is desirable.

Step 17: Sign the agreement

Finalize your Shareholder Agreement by having all the shareholders sign the document. 

Related Documents:

• Shareholders' Resolution : a document used to record shareholder resolutions or minutes
• Share Repurchase Agreement : a contract used when a corporation repurchases shares from one of its shareholders
• Shareholder's Proxy : a form used by a shareholder to grant permission for another person to cast a vote on their behalf during a shareholder meeting
• Share Purchase Agreement : a document used when a shareholder purchases or sells shares
• Shareholder Loan Agreement : an agreement used when a shareholder lends money to its corporation or when a corporation owes money to a shareholder

Personalize your Shareholder Agreement template. Print or download in minutes.

Create Your Shareholder Agreement

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A practical guide to the shareholders’ agreement

This article is written by Neha Deshmukh who is pursuing a  Diploma in M&A, Institutional Finance and Investment Laws (including PE and VC transactions) from Lawsikho .

Table of Contents

Introduction

A simplistic understanding of a shareholders’ agreement (SHA) is that it is a corporate pre-nuptial agreement. Legally speaking, an SHA seeks to regulate the relationship between some or all of the shareholders and the company itself. An SHA typically lays down various commercial rights, management rights and exit rights available to the shareholders. It also regulates the procedure for transfer of shares, valuation of shares, dividend policy, to name a few. In essence, it provides pragmatic guidance for the functioning of the company by balancing the interests of the investor vis-à-vis   the promoter.

Understanding the commercial intent

The SHA is a highly negotiated document as the parties to the agreement have varied commercial intents while entering into one. Hence, careful thought must be given while drafting an SHA to ensure that the investors’ liquidity concerns are appropriately balanced with the business interests of the promoters and the company. 

Investor’s Perspective

An investor is someone who receives some stake in the company, in return for investing in that company. However, an investor may or may not be involved in the day-to-day functioning of the company. Hence, in order to safeguard the value of the investment that has been made in the company, it is judicious and advisable to enter into an SHA. The various rights granted to the investor under the SHA are useful for checking opportunism on part of the promoters. Other key considerations are exit momentum and exit mechanisms, which allow for maximum value realization. 

Promoter’s Perspective

The promoters of the company are looking for funding and investments in order to grow the company, increase market reach, etc. However, though the promoters require the money to expand operations, they intend to dilute their shareholding to the least possible extent. Furthermore, the promoters also wish for operational flexibility as regards the day-to-day management of the company and the use of the available money. Hence, the promoters would be desirous of entering into an SHA which is not onerous on them and which has the least restrictive covenants. Another key consideration that the promoters are usually mindful of while entering into an SHA is that if the SHA, entered to prior in time, is not well-balanced in favour of the promoters, then the subsequent investors would also seek similar rights, if not more. 

Key Questions to be asked while drafting an SHA 

One can only draft an agreement which successfully captures the true intent of the parties if one is aware of what the parties seek to achieve through the agreement. A lawyer should always understand the commercial considerations and expectations of the parties to the contract. This is only possible if the lawyer asks the right questions and ensures that responses received by the client are meticulously incorporated in the agreement. While this process is highly subjective and lawyers are expected to tailor the drafting of each contract to the needs of the respective parties, yet every shareholders’ agreement should provide for certain fundamentals to avoid any gaps and prevent potential disputes. 

The author has attempted to identify all the crucial questions that ought to be asked by a lawyer tasked with drafting an SHA.

Understanding the SHA through the prism of its key clauses 

Shareholders’ agreements, not being mandated by the law, are entered into and executed simply at the will of the parties. In this backdrop, it can be understood that though not necessitated by the law, parties prefer to enter into an SHA as a matter of commercial prudence. 

The author has sought to analyze certain key clauses from the lens of the benefits which they seek to provide the right-holder while buttressing the commercial intent of the right-holder. 

Clauses regarding Share Transfer

• The SHA lays down a mechanism for regulating as well as restricting (to a certain extent) the transfer of shares as the company usually wishes to control what shareholders can do with the shares of the company. Thus, well-drafted clauses regarding the transfer of shares allow new investors to step-in by providing an exit opportunity to some existing investor, while effectively regulating the transfer of stake in the company. 
• An investor may have several motivations to invest in a particular company. One such motivation typically arises from the confidence in the promoters and the management of the company. And therefore, to ensure that they continue to hold some stake in the company and remain invested in the vision of the company, it is common to find a  Founder Lock-In  clause in the SHA. One thing that the founders need to watch out for is that this duration of lock-in can be reset every time a new funding round takes place. The duration of each founder lock-in period can vary depending upon the size of the investment being made and the stage at which the investment is being raised. The benefit of a founder lock-in is twofold – first, to ensure that trusted management continues to run the company and second, that in any case, the investors are never faced with a situation wherein they are required to manage the affairs of the company. Furthermore, though usually lock-in restrictions apply only to the promoters, however, depending upon the bargaining power of the parties, these restrictions can be imposed on the investors as well. 
• Rights incorporated in the SHA such the  Right of First Offer  (ROFO) or the  Right of First Refusal  (ROFR) allow the continuing shareholders an option to purchase the shares from the exiting investor, in order to consolidate their control over the company. Inclusion of either of these rights’ in the SHA serves dual benefit – first, it allows the continuing shareholder to maintain control over the entry of a new shareholder, and second, it addresses the liquidity concerns of the exiting investor. Whether an SHA should include the ROFO or ROFR would depend upon the circumstances in which the parties are placed and the commercial interests that they seek to secure.
• Anti – Dilution Rights  acquire great prominence in an SHA from the underlying commercial interest that a subsequent issue of shares should not dilute an investor’s or promoter’s stake in the company. It involves issuing fresh shares to the existing shareholders in order to maintain their stake in the company. 

Now, let’s understand the different motivations for securing this right:

All start-up’s and growth companies require new funding. Now, each funding round that takes place will have an overall impact on the shareholding pattern of the existing investor. Each investment round can either be an ‘up-round’ or a ‘down-round’. Now, in case of an ‘up-round’, although the equity stake of the existing investor reduces, the overall value of the shares held by the investor increases due to an increase in the valuation of the company. However, in case of a ‘down-round’, not only does the investor’s ownership over the company decrease but also the value of the investment goes down. This is where anti-dilution protection kicks-in. 

Anti-dilution protection is triggered when new shares are issued by the company at a price which is lower than the price at which the shares were purchased by the existing investor. Essentially, it protects the investor from the dilution of equity stake due to down-round financing. 

• Founder/Promoter:  

Promoters also must recognize that to prevent their holding from getting diluted over time, it is essential to secure anti-dilution rights. If the SHA does not provide for this, it could lead to disastrous effects for the founder, wherein a situation may arise that a founder could lose control or eventually be ousted from the very company he started. A glaring example of this would how Eduardo Saverin, the co-founder of Facebook, was eventually ousted from Facebook, by diluting his stake to less than 10%. 

Clauses concerning Management Rights

• Investors always seek to secure certain participatory rights in the governance of the company, in which they invest. One of the rights could be in the form of board nomination, i.e. appointment of one or more nominee directors, commonly referred to as  Investor Director(s) , by the investor, depending upon their stake in the company. Usually, the SHA provides for certain quorum requirements mandating the presence of the Investor Director. Furthermore, this investor director is usually equipped with affirmative voting rights or veto rights upon reserved matters, as specified under the SHA. 
• Sometimes, the investor may also choose to appoint a person as a  Board Observer , in a non-voting capacity, to attend meetings and track the business of the company. All these rights, taken cumulatively, definitely allow the investor to participate in the management of the company and ensure a fair deal of information symmetry. 

Confidentiality

• A company may place a contractual obligation on the shareholder(s) to not communicate or use any information relating to the business, affairs, customers, clients or suppliers of the company. 
• When drafting this clause, it is important to carefully define as to what constitutes ‘Confidential Information’ and in what circumstances is the disclosure of such Confidential Information permissible. 

Non–Compete Clause

• All SHA’s invariably contain clauses imposing non-compete obligations upon the promoters of the company. Such clauses ensure that the promoters of the investee company do not engage in any activity, which would in effect, be identical or similar to the business carried out by the company. 
• The promoters, whom this clause seeks to restrict, should ensure that this clause defines with sufficient clarity as to what constitutes a ‘competing business’. While the investors will be looking to define it widely, in order to encompass a range of activities; the promoters should try and negotiate a narrower clause, so as to limit the restrictions that are placed them. 
• While drafting the non – compete clause one needs to be mindful of the fact that the restrictions which this clause seeks to place upon the shareholder(s) are reasonable. This is especially pertinent as unreasonable restrictions are unenforceable, as per Section 27 of the Indian Contract Act, 1872. 

Dispute Resolution Clause

• The SHA does well to pre-empt a suitable resolution mechanism in case disputes arise between the parties. The dispute resolution clause lays down the governing law and also specifies the mechanism which the parties have to adopt in case a dispute arises. A pre-decided resolution policy goes a long way in overcoming deadlocks and ensuring the functionality of the business. 

Clauses concerning Exit Options

• Every investor, while making an investment in a company, is also keen to devise an exit strategy that will provide the investor with an assured exit from the company and a return on the made investment. Furthermore, from an investor’s perspective pre-deciding an exit policy is important to provide for a smooth exit from an unprofitable or non-performing investment. Usually, an exit can be structured by following any one or more of the following options:       
• Initial Public Offering 
• Third-Party Sale 
• Buyback of Securities 
• Call Option 
• Put Option 
• There may arise a situation, where even before the investor exits, the company is involved in events such as acquisition, merger, consolidation, demerger, substantial sale of assets or shares, winding-up proceedings, or even change in control. Any such event generally falls under the definition of ‘Liquidation Event’ under an SHA. An SHA usually provides the right of  Liquidation Preference  to an investor upon the occurrence of a Liquidation Event. As per this right, upon the happening of the Liquidation Event, an investor is entitled to not only receive the investment amount, but also a certain agreed percentage of proceeds, in preference over other shareholders. An investor will always try to secure the value of the investment made and this clause ensures that an investor will get the assured returns even if a Liquidation Event occurs. From a promoter’s perspective, two considerations gain prominence in this regard – first, to ensure that careful negotiations take place to determine as to which happenings would qualify as a Liquidation Event, and second, to try to settle on a narrow definition of Liquidation Event, in order to minimize the happenings that trigger the payment of Liquidation Preference. 
• Clauses concerning the exit options may seem disproportionately balanced in favour of investors. However, it is important to understand that the commercial intent behind these clauses is essentially to protect the value of the investment and to ensure an exit momentum. 

The SHA finds its purpose well in protecting the interests of the shareholders by providing them specific rights, over and above those, provided by the Companies Act, 2013. It is typically like a safety net, which seeks to protect the investor against the various contingencies that may arise during the course of the business. It is a given that an SHA inspires investor confidence and can help the company secure further investments. Although some clauses appear to be onerous on the promoters, if rationalized and negotiated appropriately, a well-balanced SHA, tailor-made to suit the commercial necessities of parties, is achievable. 

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35 U.S. Code § 261 - Ownership; assignment

Subject to the provisions of this title, patents shall have the attributes of personal property. The Patent and Trademark Office shall maintain a register of interests in patents and applications for patents and shall record any document related thereto upon request, and may require a fee therefor.

Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.

A certificate of acknowledgment under the hand and official seal of a person authorized to administer oaths within the United States, or, in a foreign country, of a diplomatic or consular officer of the United States or an officer authorized to administer oaths whose authority is proved by a certificate of a diplomatic or consular officer of the United States, or apostille of an official designated by a foreign country which, by treaty or convention, accords like effect to apostilles of designated officials in the United States, shall be prima facie evidence of the execution of an assignment, grant or conveyance of a patent or application for patent.

An interest that constitutes an assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.

Based on Title 35, U.S.C., 1946 ed., § 47 (R.S. 4898, amended (1) Mar. 3, 1897, ch. 391, § 5, 29 Stat. 93 [ 29 Stat. 693 ], (2) Feb. 18, 1922, ch. 58, § 6, 42 Stat. 391 , (3) Aug. 18, 1941, ch. 370, 55 Stat. 634 ).

The first paragraph is new but is declaratory only. The second paragraph is the same as in the corresponding section of existing statute. The third paragraph is from the existing statute, a specific reference to another statute is omitted. The fourth paragraph is the same as the existing statute but language has been changed.

2012— Pub. L. 112–211 inserted “The Patent and Trademark Office shall maintain a register of interests in patents and applications for patents and shall record any document related thereto upon request, and may require a fee therefor.” at end of first par. and substituted “An interest that constitutes an assignment” for “An assignment” in fourth par.

1982— Pub. L. 97–247 inserted “, or apostille of an official designated by a foreign country which, by treaty or convention, accords like effect to apostilles of designated officials in the United States”.

1975— Pub. L. 93–596 substituted “Patent and Trademark Office” for “Patent Office”.

Amendment by Pub. L. 112–211 effective on the date that is 1 year after Dec. 18, 2012 , applicable to patents issued before, on, or after that effective date and patent applications pending on or filed after that effective date, and not effective with respect to patents in litigation commenced before that effective date, see section 203 of Pub. L. 112–211 , set out as an Effective Date note under section 27 of this title .

Amendment by Pub. L. 97–247 effective Aug. 27, 1982 , see section 17(a) of Pub. L. 97–247 , set out as a note under section 41 of this title .

Amendment by Pub. L. 93–596 effective Jan. 2, 1975 , see section 4 of Pub. L. 93–596 , set out as a note under section 1111 of Title 15 , Commerce and Trade.

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Voting Rights of Common Stock Ownership

• The Influence of Voting Rights in a Company's Decisions

Hostile Takeover

• Corporate Finance

The Voting Rights of Common Stock Shareholders

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Common stock shareholders in a publicly-traded company have certain rights pertaining to their equity investment, and among the more important of these is the right to vote on certain corporate matters. Shareholders typically have the right to vote in elections for the board of directors and on proposed operational alterations such as shifts of corporate aims and goals or fundamental structural changes .

Shareholders also have the right to vote on matters that directly affect their stock ownership, such as the company doing a stock split or a proposed merger or acquisition . They may also have the right to vote on executive compensation packages and other administrative issues.

Key Takeaways

• Anyone who owns stock in a company has a voting right to the decisions that the company makes.
• The fewer shares someone owns, the less voting power they have as each share is one vote.
• Voting has a significant impact on the price of the shares someone owns. For this reason, education about a company's proposed decisions is of the utmost importance.

Common stock ownership always carries voting rights , but the nature of the rights and the specific issues shareholders are entitled to vote on can vary considerably from one company to another. Some companies grant stockholders one vote per share, thus giving those shareholders with a greater investment in the company a greater say in corporate decision-making.

Shareholders can exercise their voting rights in person at the corporation's annual general meeting or other special meeting convened for voting purposes, or by proxy . Proxy forms are sent to shareholders, along with their invitations, to attend the shareholders' meeting. These forms list and describe all the issues on which shareholders have the right to vote. A shareholder may elect to fill out the form and mail in their votes on the issues rather than voting in person. Shareholders can also enter their votes over the phone or on the internet.

The Influence of Voting Rights in a Company's Decisions 

Since the issues on which shareholders can vote, at least in part, determine the profitability of the company going forward, voting rights in such matters allow shareholders to influence the success of their investment. Decisions made at the annual shareholders' meeting can be the deciding factor in whether a company's stock price subsequently doubles or declines by 50 percent. Therefore, shareholders need to take advantage of the opportunity to positively influence corporate direction.

Shareholders should thoroughly analyze proposals being presented for a vote. For example, there may be proposals for the company to take action that amounts to creating a " poison pill " designed to thwart a possible takeover by another firm. While such proposals may be beneficial for corporate management personnel, they may not necessarily be in the best interests of shareholders who could realize substantial capital gains from their stock shares in the event of a takeover. Any proposed changes to the company's bylaws should be carefully scrutinized, as should company management proposals to change legal or accounting firms.

Proposed stock option or stock split plans can have a significant impact on the value of existing shares, and so such proposals merit careful evaluation by shareholders before voting. Another item for shareholder analysis is the company's Compensation Committee Report. Investors should review the company's compensation plan to determine things such as the overall reasonableness of executive compensation packages and how effectively bonuses are tied to actual performance.

Because shareholders have a proportional influence per their stake, certain market movers or "hostile" activist investors will amass a large stake in a company through purchasing shares. When they have enough shareholder power to sway a vote, they will step in and direct the company in the direction that benefits them or they may purchase enough shares to become the majority shareholder of the company. When that happens, they can direct it more assertively.

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Assignment Center has replaced the Electronic Patent Application System (EPAS) and Electronic Trademark Assignment System (ETAS). Assignment Center makes it easier to transfer ownership or change the name on your patent or trademark registration. 

See our how-to guides on using Assignment Center for   patents  and  trademarks . If you have questions, email  [email protected]  or call customer service at 800-972-6382.

Patents Assignments: Change & search ownership

Change of owner (assignment) and change of owner name.

During examination of a patent application or after the patent is granted, the owner of the patent may:

• Transfer ownership to another entity or party through an "assignment;" or
• Retain ownership but change their name.

The original owner should record the assignment or name change with the USPTO's Assignment Recordation Branch by going to Assignment Center and filing a Recordation Cover Sheet along with a copy of the actual assignment or proof of name change.

Change Ownership - Assignment Center

Use Assignment Center to file a Patent Assignment Recordation Cover Sheet and attach the supporting legal documentation as a black-and-white TIFF or PDF file. You may email questions about filing patent assignments to [email protected] .

Patent Assignment Search

Use  Patent Assignment Search  to search the database of all recorded Patent Assignment information from 1980 to the present (Patent Assignments recorded prior to 1980 are maintained at the National Archives and Records Administration). You may email questions about searching patent assignments to [email protected] .

For further information, you may contact the Assignment Recordation Branch Customer Service Desk at 571-272-3350 from 8:30 am – 5:00 pm Eastern Time.

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How to Transfer Shares of Stock in a Corporation

Philippine law treats shares of stock in a corporation as personal property . Similar to other personalty, the owner of the property can sell, assign, transfer or convey his property to another as he wishes. This is an attribute and principle of ownership which cannot be taken away. However, being in the nature of intangible personal property, the law regulates such kinds of properties, including the manner in which they can be conveyed or transferred.

Section 63 of the corporation code affirms that the owner of a share of stock in a corporation has the right to transfer his shares . It is the provision that outlines the fundamental requirements which must be complied with if a stockholder in a corporation wishes to transfer his shares to another. Section 63 reads:

“ Sec. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided into shares for which certificates signed by the president or vice president, countersigned by the secretary or assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in the books of the corporation showing the names of the parties to the transaction, the date of the transfer, the number of the certificate or certificates and the number of shares transferred.

No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. “

Being intangible personalty, the corporation code requires that , before a share of capital stock is validly sold, transferred, assigned or in any manner conveyed, it must be covered by a stock certificate . This requirement is borne out of practical considerations. It is a fundamental principle of contract law (be it of sale, assignment or any other conveyance) in the Philippines and probably in any jurisdiction, that the parties to any contract must be aware of the subject matter – what is being sold, transferred or otherwise conveyed. On the other hand, shares of stock in a corporation do not have physical form, unlike ordinary chattel such as goods or vehicles, where a person has a clear notion of what is being sold or conveyed.

The stock certificate is evidence of the personalty owned by the stockholder. It defines the nature and extent of his ownership over the share/s of stock. It also outlines the regulations and limitations of ownership, which must be considered and made known to the parties prior to any conveyance. Obviously, without the stock certificate, these matters would be unknown to a prospective buyer or transferee of shares of stock. Simply stated, the subject matter of the conveyance will not be clear. Therefore, only shares of stock covered by a stock certificate can be subject of a legally demandable and binding sale or disposition.

There may be instances where shares of stock are sold or transferred prior to the issuance of stock certificates. At best, these transactions are only binding between the parties, and will not bind the corporation. As a matter of fact, the corporation can legally refuse to recognize such transfers, especially if the shares which were sold have not yet been fully paid. The last paragraph of Section 63 states that no shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. This means that the corporation can altogether refuse to recognize the validity of a sale or transfer of a share of capital stock that has not been fully paid, or which the corporation has a lien. In this case, the purchaser’s only remedy lies with the stockholder.

In the case of De los Santos, et al. vs. MacGrath, et al., G.R. No. L-4818, 28 February 1955 , the Supreme Court interpreted the provisions of Section 63 of the corporation code . The Supreme Court held that any voluntary transfer of shares of stock in a corporation that is represented by a certificate of stock must strictly comply with the following conditions:

a. There must be delivery of the certificate;

b. The share must be indorsed by the owner or his agent; and

c. To be valid to the corporation and third parties, the transfer must be recorded in the books of the corporation.

One of the requirements to effect a valid transfer of shares of stock is that the certificate of stock must be endorsed by the owner or his agent . Mere delivery or handing over of the stock certificate is insufficient , and does not produce the effects of a transfer or conveyance to another. Endorsement of the stock certificate is one of the operative acts which validates the transfer . Without the act of endorsement by the stockholder, the sale or disposition will not be binding upon the corporation. Of course, there are remedies under the law to compel the owner to endorse the stock certificate which he or she has already conveyed to another. But before endorsement of the stock certificate, the corporation can refuse recognize the transferee stockholder.

Moreover, as between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks only to its books for the purpose of determining who its shareholders are. Thus, as between the “real” owner of a stock certificate and the registered owner or the person actually registered in the Stock and Transfer Book of a corporation , it is the person registered in the Stock and Transfer Book who must sign or endorse the certificate of stock to allow its sale or transfer.

Further, the Supreme Court in the case of Padgett vs. Babcock & Templeton, Inc., G.R. No. 38684, 21 December 1933, held that shares of corporate stock are regarded as personal property and may be disposed by the owner as he sees fit, unless the corporation is dissolved, or unless the right to do so is properly restricted or the owner’s privilege is hampered by his actions. A corporation cannot impose undue restrictions upon the owner’s right to sell, transfer or otherwise convey his shares of stock.

According to the Supreme Court, a restriction imposed upon a stock certificate, which unduly prohibits the owner from conveying his property, is null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade. It was also held that any restriction on a stockholder’s right to dispose of his shares must be construed strictly; and any attempt to restrain a transfer of shares is regarded as being in restraint of trade, in the absence of a valid lien upon its shares, and except to the extent that valid restrictive regulations and agreements exist and are applicable. Subject only to such restrictions, a stockholder cannot be controlled in or restrained from exercising his right to transfer by the corporation or its officers or by other stockholders, even though the sale is to a competitor of the company, or to an insolvent person, or even though a controlling interest is sold to one purchaser.

However, recognizing the right of the corporation to regulate the transfer of shares of stock in a corporation, the Supreme Court stated that there can be restrictive regulations or agreements which can be entered into between the corporation and the stockholder, to regulate ownership of the shares of stock. These regulations or agreements pertain to those indicated in the certificates of stock, and also those that may be found in the By-Laws of the corporation. The Supreme Court emphasized that these regulations are construed strictly against the corporation, and in favor of the ownership rights of the stockholder. An absolute prohibition from selling shares of stock was held as null and void on the ground that it constitutes and unreasonable limitation of the right of ownership and is in restraint of trade.

An example of a invalid restriction upon the right of a stockholder to dispose of a share of stock in a corporation is found in the case of in the case of Fleischer vs. Botica Nolasco Co., 47 Phil 583 . In this case, the Supreme Court discussed the validity of a clause in the by-laws of a corporation which prohibited the owner of a stock certificate from selling his shares to any person other than the corporation. The by-laws mandated that the owner of a share of stock could not sell it to another person except to the corporation.

In deciding the legality and validity of said restriction, the Supreme Court ruled that the only restraint imposed by the Corporation Law upon transfer of shares is that no transfer of shares of stock shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. According to the Supreme Court, this restriction is necessary in order that the officers of the corporation may know who its stockholders are, which is essential in conducting elections of officers, in calling meetings of stockholders, and for other purposes.

The Supreme Court declared that any restriction in the by-laws which exceeds what is provided in the corporation code is ultra vires, violative of the property rights of shareholders, and in restraint of trade. This is because the by-laws of a corporation cannot contradict the general policy of the laws of the land, and must always be strictly subordinate to Philippine laws.

In Rural Bank of Salinas vs. Court of Appeals, G.R. No. 96674, 26 June 1992, the Supreme Court held that a corporation, either by its board, its by-laws, or the act of its officers, cannot create restrictions in stock transfers. The corporation code contemplates no restriction as to whom the stocks may be transferred. It does not suggest that any discrimination may be created by the corporation in favor of, or against a certain purchaser. The owner of shares, as owner of personal property, is at liberty, under said section to dispose them in favor of whomever he pleases, without limitation in this respect, than the general provisions of law. The only limitation imposed by Section 63 of the corporation code is when the corporation holds any unpaid claim against the shares intended to be transferred, which was not present in the case.

This is how to transfer shares of stock in the Philippines.

Nicolas & De Vega Law Offices is a full service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 4706126, +632 4706130, or e-mail us at [email protected] .

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§261. Ownership; assignment

Subject to the provisions of this title, patents shall have the attributes of personal property. The Patent and Trademark Office shall maintain a register of interests in patents and applications for patents and shall record any document related thereto upon request, and may require a fee therefor.

Applications for patent, patents, or any interest therein, shall be assignable in law by an instrument in writing. The applicant, patentee, or his assigns or legal representatives may in like manner grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part of the United States.

A certificate of acknowledgment under the hand and official seal of a person authorized to administer oaths within the United States, or, in a foreign country, of a diplomatic or consular officer of the United States or an officer authorized to administer oaths whose authority is proved by a certificate of a diplomatic or consular officer of the United States, or apostille of an official designated by a foreign country which, by treaty or convention, accords like effect to apostilles of designated officials in the United States, shall be prima facie evidence of the execution of an assignment, grant or conveyance of a patent or application for patent.

An interest that constitutes an assignment, grant or conveyance shall be void as against any subsequent purchaser or mortgagee for a valuable consideration, without notice, unless it is recorded in the Patent and Trademark Office within three months from its date or prior to the date of such subsequent purchase or mortgage.

Pub. L. 112–211, title II, §201(d), Dec. 18, 2012, 126 Stat. 1535 .)

Historical and Revision Notes

Based on Title 35, U.S.C., 1946 ed., §47 (R.S. 4898, amended (1) Mar. 3, 1897, ch. 391, §5, 29 Stat. 93 [ 29 Stat. 693 ], (2) Feb. 18, 1922, ch. 58, §6, 42 Stat. 391 , (3) Aug. 18, 1941, ch. 370, 55 Stat. 634 ).

The first paragraph is new but is declaratory only. The second paragraph is the same as in the corresponding section of existing statute. The third paragraph is from the existing statute, a specific reference to another statute is omitted. The fourth paragraph is the same as the existing statute but language has been changed.

Editorial Notes

Pub. L. 112–211 inserted "The Patent and Trademark Office shall maintain a register of interests in patents and applications for patents and shall record any document related thereto upon request, and may require a fee therefor." at end of first par. and substituted "An interest that constitutes an assignment" for "An assignment" in fourth par.

Pub. L. 97–247 inserted ", or apostille of an official designated by a foreign country which, by treaty or convention, accords like effect to apostilles of designated officials in the United States".

Pub. L. 93–596 substituted "Patent and Trademark Office" for "Patent Office".

Statutory Notes and Related Subsidiaries

Effective date of 2012 amendment.

Pub. L. 112–211, set out as an Effective Date note under section 27 of this title .

Effective Date of 1982 Amendment

Pub. L. 97–247, set out as a note under section 41 of this title .

Effective Date of 1975 Amendment

Pub. L. 93–596, set out as a note under section 1111 of Title 15 , Commerce and Trade.

Assignment of Interest In LLC: Everything You Need to Know

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. 3 min read updated on February 01, 2023

Updated October 28, 2020:

Assignment of interest in LLCs happens when a member communicates to other members his/her intention to transfer part or all of his ownership rights in the LLC to another entity. The assignment is usually done as a means for members to provide collateral for personal loans, settle debts, or leave the LLC. The member (assignor) and the person assigned (assignee) sign a document called the Membership Assignment of Interest.

Why a Member May Want to Assign Interest

A member may choose to assign interest for a number of reasons.

• The assignment of interest may happen as collateral to a loan to one of the members.
• Some members can assign interest to settle debts. The assignment will be effective until the debt is cleared.
• An assignment of interest can also' be done  to a member's legal heirs , going into effect upon the death of a member. 

The Rights and Limitations of the Assignee

The laws governing LLC membership interest assignments vary considerably from one state to another. 

• Most states prohibit the assignee from participating in the LLC's operations or decisions unless the Articles of Organization have this provision.
• An assignee is protected from liability from the assignor until the assignee becomes a member in most states. However, the law in a few states, including California and Florida, states that the assignee does get the assignor's liability.
• Should the assignee become a member after the assignment, he is only entitled to the rights and restrictions the assignor had.
• The assignment usually gives the assignee the right to receive the assignor's share of the profits — but not necessarily the other rights.

The Rights and Limitations of the Assignor

• In many states, all LLC members have the right to assign membership interest.
• In most states, assigning interest does not necessarily lead to forfeiting of voting and management rights and can be temporary. Texas law, on the other hand, states that the assignor ceases to be a member of the LLC after the assignment.

The Rights and Limitations of Other Members

• All members of the LLC have to be notified of any type of assignment.
• Some states require the assignment of interest to be approved by all members.
• The new person who has been assigned interest does not necessarily become a member even if the assigner has decided to leave the LLC. The other members can decide whether to admit the assignee as a member or not. Should a member assign interest without the input of other members, the interest is normally limited to financial benefits.
• In a two-member LLC, one member can easily transfer the interest to the other. 

The Membership Interest Assignment Document

The LLC's operating agreement should explain the rights of members on issues of transfer of interest, and the agreement should be followed during the assignment process. The Membership Interest Assignment acts as a record of the agreement, and the LLC normally keeps a copy of the document. The law in most states does not provide a formal template of the Membership Interest Assignment document but lists what should be included in the document. The document should have the following details:

• Percentage of interest that will go to the assignee 
• Whether the assignee will have voting rights
• The signatures of the assignor and the assignee

Assignment of Interest Versus Selling Ownership Stake

The assignment of interest is typically different from selling the ownership stake . Selling a member's ownership stake in the LLC requires unanimous approval by the other members. A departing member may also assign his membership to another member.

If a member is being paid to transfer interest, this is treated for tax purposes as a sale, and the selling member's gains might be liable to capital gains tax. Even if a departing member is not paid for his interest, if the departure results in the assignee getting the departing members' share of liability, the departure is seen as an exchange or sale.

Assignment of Interest Versus Abandoning an LLC

If a member wants to withdraw interest in an LLC, he/she can choose to simply legally abandon the LLC in most states. The abandoning member should give some kind of notice to the other members explaining that he is abandoning membership. Abandoning membership does not usually require the approval of other members.

Abandoning an LLC does not absolve the member of liability he/she may have incurred when still a member.

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