Shareholders’ Agreements . . .
are contracts entered into between company
shareholders, usually at the insistence of a minority shareholder. A
venture capitalist who does not acquire control with his purchase of
company stock will usually require a shareholders’ agreement as a
condition of funding. Management that sells a controlling interest in
its company’s common stock normally insists upon a shareholders’
agreement to ensure its continued ability to run the company.
Shareholders’ agreements can take a variety of forms
and can serve a variety of purposes. They are usually in writing and
signed by persons who together own at least a majority of the
outstanding shares of the company’s voting stock.
Shareholders’ agreements enable a minority
shareholder to exercise more control over a company that he would have
otherwise. (By voting his minority interest in the company’s shares,
he would have no control). A venture capitalist, for example, will
almost always insist that management agree to vote its shares so that
he will be ensured a seat on the company’s board of directors.
Sometimes an investor will ask for other types of control as well,
such as the right to veto certain important financial decisions made
by the directors.
Shareholders’ agreements often contain other
provisions affecting management and its relationship with its
investors. These provisions commonly contain limitations on the
manager’s ability to sell his shares to outsiders and provide for
the disposition of his shares in the event of his death or termination
of employment. Shareholders’ agreements are also commonly used for
estate planning purposes.
Management should consider shareholders’
agreements carefully. They should have a limited term and, in most
cases, should terminate in the event of a public offering of the
company’s stock or sale of the company. See:
Agreements, Common Stock,
Voting, First Refusal Rights