If you go on the public markets, you usually will buy stock without having to sign or agree to a shareholder agreement—or at least, the terms of the agreement aren't of significant importance, given that you are just one of thousands (or more) other shareholders.
The simple fact is that when large publicly traded companies sell stock, the purchasers are really no more than investors. They have no active role in the operation or governance of the company, at least not directly.
Read on as our Chicago corporate attorney at Ellis Legal explains common provisions in shareholders agreements.
Smaller Companies
However, with smaller, midsized, or private companies, shareholders usually take on a more significant role. Because they are much more involved, having a shareholder agreement is of vital importance.
Shareholders may need more protection with a shareholder agreement, given that there is not the same assurance that a smaller business has the management or capital that one traded on the public markets does. There may also be the risk of the business closing or engaging in illegal activities.
In some cases, shareholders are given shares specifically for their engagement with the company—that is, in return for work in an area of expertise they are doing for a company.
What's in a Shareholder's Agreement?
All of this is why a shareholders agreement becomes very important. A typical shareholders agreement will spell out what is being paid for the stock, including specifying if any in-kind services are being provided or what services are expected to be provided going forward.
The shareholder agreement will also specify whether any work needs to be done by the shareholder at all; some shareholders are just passive investors.
It may also specify what information the shareholders have rights to view and access and how and when they can make such requests. The agreements may also include confidentiality provisions.
Board Member Shareholders
Shareholders who are also board members should understand what their duties and rights are with respect to both positions, something that should be stated in the shareholder's agreements, as well as your corporate governing documents.
Losing one position doesn't mean losing the other—most companies have procedures for removing board members, but that doesn't divest that person from ownership in their shares.
Voting
In some matters, shareholders may have a right to vote (usually with shareholders who are more active or knowledgeable about corporate operations), while more passive "investor-only" shareholders will not have any right to vote. Either way, you can structure it as you like, so long as the voting rights are spelled out in the corporate documents, as well as the shareholder agreement.
Losing Shares
Shareholder agreements will also normally spell out what happens in the case of loss of shares—can they be transferred to just anyone? What if they are lost involuntarily, such as through bankruptcy, divorce, or death? In many cases, the company has the option to repurchase the shares.
Do you need shareholders' agreements drafted or reviewed? Let us help. Speak with a Chicago business and corporate attorney at Ellis Legal at (312) 967-7629.