Shareholder Agreements
Illinois Shareholders Agreement Lawyer
The success of a business starts with a solid foundation. As owners of a corporation, a shareholder agreement is important for shareholders to know their rights and duties, and provide clear guidelines about the shareholders’ contribution to the company and their profit.
By addressing issues related to share transfer, dividends, and dispute resolution, a shareholder agreement will help you establish clear expectations among the owners and bring transparency among business owners.
Motiva Business Law’s Shareholder Agreement attorneys will ensure the creation of a solid framework that enables smooth operations and protects the interests of all parties involved.
Motiva Business Law Offers
- Shareholders' Agreement
- Corporate Bylaws
- Articles of Incorporation
- Operating Agreement
- SAFE notes
- Convertible notes
What is a shareholder agreement?
A shareholders agreement, also known as a stockholder agreement, is a contract that defines the rights and obligations of a corporation’s shareholders, including ownership stake, voting rights, and dividend distribution.
The purpose of this contract is to protect the shareholders’ investment, govern how the company is run, and establish a fair relationship between the investors.
A shareholder agreement will set out the process for key business decisions, such as operational matters, the conditions for share transfer, board member selection, and dispute resolution mechanisms.
With the agreement, a corporation can streamline the decision-making process, ensure transparency, and minimize the risk of disputes.
Is Having a Shareholder Agreement Mandatory?
Although a corporation is not legally required to have a shareholders’ agreement, they are essential tools to enable smooth transactions and protect investors, especially minority shareholders.
Shareholder agreements are mostly recommended for private corporations where shares are not publicly traded.
Ideally, shareholders’ agreements must be put in place at the starting stages of the formation of the company. When the first shares are issued, the shareholders should define what they expect to contribute and get from the company. Once the shareholder and involved parties get to an agreement, they must sign the legal document for it to be effective and enforceable.
Why do I need a Shareholder’s Agreement?
Having a shareholder agreement is important for the following reasons:
- Dispute protection: Through dispute prevention disputes, a shareholder’s agreement sets a reference point to resolve issues that may arise and prevent the need for litigation.
- Ensure transparency: With this contract, shareholders have clear expectations of their position in the company, as they know what their roles and obligations are.
- Optimize decision-making process: Establish a procedure for decision-making and leave specific matters in the hands of shareholders, rather than in the board of directors’s.
- Protect minority shareholders’ rights: As a minority shareholder (one that owns less than 50% of the shares), you will generally have little decision-making power over the company. However, with a shareholder agreement that requires all investors to approve certain decisions, your say can have an impact on the company.
- Control the ownership of the company: The contract can be a useful mechanism to restrict how can shares be issued or sold, who can acquire shares in the company, how shareholders can exit the company, and define the treatment of shares in the event a shareholder dies.
- Define the distribution of profit: A shareholders’ agreement can set a varied dividend policy that defines how the different classes of shares are going to be distributed, according to the contract’s timing, frequency, and calculation guidelines.
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What is included in a shareholder agreement?
Voting rights
It’s key for the contract to designate the frequency and procedures in which meetings of shareholders and directors must be held. The contract will determine what ownership percentage is required to make certain decisions. For example, fundamental decisions related to the business structure may require a unanimous decision by all the shareholders, while other less important may simply require a majority vote.
Equity ownership and distribution
This portion of the document defines the price of shares, the dividend payment, and the shareholders’ financial contribution toward the corporation. Through a price-per-share, the agreement sets the value of each share divided by the total number of shares. Dividends determine the amount shareholders are entitled to receive according to the value of their owned shares.
Share transfer and ownership
This section will specify the procedure to transfer or acquire shares and buyout provisions, which dictate the share treatment when a shareholder wants to exit the company. Some clauses that handle the latter situation include the right of first refusal, shotgun, and tag-along.
Dispute resolution procedures
The shareholders’ agreement establishes procedures that provide strategies to resolve conflicts in the event of a breach of contract or other disputes.
Risk of not having a shareholder Agreement
The following can be some of the ways your corporation can be affected if it lacks a shareholders’ agreement:
- Increase the potential for disputes
- Difficulty in attracting investors
- Loss of business control and difficulty in management
- Unwanted exit of shareholders
- Difficulty with share transfer and sale of the business
- Vulnerability of minor shareholders
Our Shareholder Agreement attorney works to protect your company
Our shareholder agreement attorneys at Motiva Business Law will ensure to write a governing document that safeguards the interests of the company and the parties involved.
With our legal assistance, you can expect a comprehensive shareholder agreement that addresses key aspects such as ownership rights, decision-making processes, profit distribution, dispute resolution, and more. Our meticulous approach ensures that your company is equipped with a robust framework for governance, helping to mitigate potential conflicts and pave the way for sustained success.
Trust Motiva Business Law business contract attorneys to create a customized shareholder agreement that safeguards your company’s future and facilitates its growth
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Shareholders' Agreement FAQ
Both legal documents dictate the internal governance of a business, however, the main difference is that while shareholder agreements apply to corporations, operating agreements are used by Limited Liability Companies (LLCs).
LLCs do not have shareholders, they have members. The operating agreement will outline the rights and responsibilities of the members, profit and loss allocation, decision-making processes, and procedures for admitting new members or transferring ownership.
Both contracts govern the operations and relationships between a corporation. However, it is legally required for a corporation to have corporate bylaws, as they define the operational policies of the company, while shareholder agreements are optional and specify certain rights and obligations among shareholders.
Typically, a shareholders’ agreement will override the corporate bylaws.
No. Since a shareholders agreement is a confidential document between shareholders, it does not need to be registered.
Yes, but amending the contract will likely require the other shareholders and involved parties’ consent.
Typically found in shareholders’ agreements when specifying the terms of share transfer, a tag-along provision, or piggyback provision, is a clause that enables a minority shareholder the right to include their shares in the sale of a majority shareholder under the same terms.