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: Benchmarks, Buy-Sell Agreements, Common Stock,  Control, Co-Sale Agreements, Cumulative Voting, First Refusal Rights (Shareholders).