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By Sanjeev Kumar
Founding Attorney

There are several documents that are foundational in starting a business. A shareholder agreement is one such document. The shareholder agreement essentially lays down how the business will be run. It is very important to properly draft a shareholder agreement when there is more than one person investing in the business. It will outline not only outline how the business will be managed, but it will work to manage shareholder expectations and establish critical consistencies in how the company will handle a wide range of issues that may come up.

What Should Be in a Shareholder Agreement?

There is a wide range of things that can and should be included in a shareholder agreement. It is always best to be as specific and detailed as possible when drafting the shareholder agreement. Keep in mind that one of the central roles of a shareholder agreement is to set boundaries that will manage expectations and set forth specific guidelines that you can turn to when disputes arise. There are a few topics that you must be sure to include in the agreement, including:

  • Listing the names and contact information for all initial shareholders. You will also want to outline the specific duties and responsibilities of each shareholder. Determine and include who will be the managing shareholder. Being clear on the role of each shareholder will help to avoid disputes and streamline how the company is being run.
  • You will also want to establish the voting rights of every shareholder. Additionally, the agreement should detail what type of vote is required for certain decision types. You may want some business decisions to require a mere majority vote of the shareholders. With other decisions, you may want to require a higher percentage than a simple majority in order for the business to accept the outcome. 
  • A shareholder may want to sell or transfer their percentage of ownership in the company. The shareholder agreement should outline the circumstances where this is acceptable and how the sale or transfer should occur. You may wish to place certain restrictions on the transfer or sale. In the alternative, you may wish to outline when sales or transfers are allowed.
  • Every party who is to sign the initial shareholder agreement should have his or her legal obligations to the company established within the agreement itself. This means detailing the structure of the business and everyone’s role in the business. Being clear with the legal obligations in the agreement will not only provide critical guidance as to company roles, but it will also be something that will settle shareholder disputes when they arise. If it is suspected that someone is stepping outside his or her role, you can always come back to the shareholder agreement to validate this.

The shareholder agreement should also include provisions for dispute resolution. Should a dispute arise between the shareholders, how will it be resolved? Will it be resolved internally? Or will outside help need to come in to settle things?

Austin Business Law Attorney

The above list is just the beginning of what should be included in a shareholder agreement. Much of what should be included will depend on the company itself. Start your business off right by seeking counsel from The Kumar Law Firm. We are here to set your business up for success. Contact us today.

About the Author
Sanjeev Kumar is the founder and principal at the Kumar Law Firm, which provides a wide range of legal services to entrepreneurs and business owners in the area of business & corporate law and intellectual property along with related areas of interest to clients such as business succession planning, wealth preservation through estate planning, and alternate dispute resolution.