Shareholder Agreement Template - Get Free Sample
Shareholder Agreement Template
This shareholder agreement template sets out the terms of how corporate shareholders will interact with each other and what happens if one or more want to get out of the business, or something happens that forces exit of a shareholder or shutdown of the company.
THIS AGREEMENT, dated [AGREEMENT DATE] is entered into amongst the following individuals constituting all of the current shareholders of [CORPORATION] (“Corporation”):
[SHAREHOLDER 1]
[SHAREHOLDER 2]
[SHAREHOLDER 3]
[SHAREHOLDER 4]
(referred to collectively as “Shareholders” and individually as “Shareholder”) and the Corporation.
Modify according to the nu sometimes there are only two.
Article 1 – Purpose of Agreement
The Shareholders are all the shareholders of the Corporation, a [STATE OF INCORPORATION] corporation and are the sole Directors and Officers of the Corporation.
The Shareholders are entering into this Shareholder Agreement to provide for the management and control of the affairs of the Corporation, including management of the business, division of profits, disposition of shares, and distribution of assets on liquidation.
Article 2 – Shares Subject to Agreement
The Shareholders listed above own the number of shares of common stock, and approximate percentage of company ownership, as listed below:
Number of Shares
Percentage of Ownership
[SHAREHOLDER 1]
[SHARES 1]
[PERCENT 1]
[SHAREHOLDER 2]
[SHARES 2]
[PERCENT 2]
[SHAREHOLDER 3]
[SHARES 3]
[PERCENT 3]
[SHAREHOLDER 4]
[SHARES 4]
[PERCENT 4]
The shares listed above constitute all of the issued and outstanding capital stock of the Corporation. The Corporation acknowledges receipt from each Shareholder of the full consideration for the respective shares listed above, and each Shareholder acknowledges receipt of certificates representing his or her shares. All of the shares listed above and any additional shares of the capital stock of the Corporation that may be acquired by the Shareholders in the future shall be subject to this Agreement.
Article 3 – Management and Control
Board of Directors. Subject to termination in accordance with this Agreement, each Shareholder to this Agreement will be a director of the Corporation.
Authority of Directors.
During the term of this Agreement, the directors will, when appropriate, perform the following acts:
Determine in good faith the “current assets” of the Corporation for purposes of corporate distributions as required by the California Corporations C
Cause an quarterly report to be sent to the Shareholders not later than 30 days after the close of the quarter year, such quarterly report will be used to identify and approve any distributions in accordance with this A
After filing the Corporation’s original Articles of Incorporation, file any informational certificates that may be required by the California Secretary of S
Cause the Corporation to maintain the books, records, and other documents required by C
Use best efforts to cause the business of the corporation in accordance with sound business practices.
President. Subject to the limitations in Section 3.7, the President of the Corporation will be its managing officer. The President will control the day-to-day operations of the business and affairs of the Corporation, including the following:
[PRESIDENT ACTIONS W/O APPROVAL].
Vice President. Subject to the limitations in Section 3.7, the Vice President of the Corporation will [VICE PRESIDENT DUTIES].
Treasurer.
Subject to the limitations in Section 3.7, the Treasurer of the Corporation will [TREASURER DUTIES].
Secretary.
Subject to the limitations in Section 3.7, the Secretary of the Corporation will [SECRETARY DUTIES].
Limitations on actions of officers.
The following actions shall not be made by any one Officer without the approval of all Officers of the Corporation:
[JOINT APPROVAL REQUIRED ACTIONS].
In drafting this section, think of anything that would be upsetting to a shareholder if the action were taken without them having a say, perhaps entering into certain types of business transaction, hiring, or other significant actions.
Approval of All Shareholders. Notwithstanding any contrary provisions in this Shareholder Agreement, the written consent of all of the Shareholders is required to approve the following actions:
mergers or consolidations involving the C amendment or repeal of the Articles of Incorporation of the C issuance of shares of any class or other rights relating to the issuance of shares of the C transfer of all, or substantially all, the assets of the C amendment of this Shareholder A or voluntary dissolution of the Corporation.
Employment of Shareholders. Shareholders may be employed as officers of the Corporation, as long as they hold shares of stock of the Corporation, are active in its business, and, in a satisfactory manner, perform their duties and responsibilities as set forth in this Agreement, the Articles of Incorporation and the Bylaws of the Corporation.
The title, duties, and the other terms of employment, including the annual salary, will be memorialized in a separate document and must be both approved, and only may be subsequently altered, only by the unanimous written consent of the Shareholders.
This can be a common issue for dispute among shareholders, each thinking the other is not working hard enough, getting paid too much, etc.
Use of detailed Employment Agreements, or placing those terms here, can help alleviate future disputes.
Article 4 – Noncompetition and Trade Secrets
Noncompetition.
Each Shareholder agrees that as long as he or she is the owner, or in control of, any of the Corporation’s shares, the Shareholder will not be employed, concerned, or financially interested, either directly or indirectly, in the same or a similar business as that conducted by the Corporation, or compete with the Corporation.
Trade Secrets. Each Shareholder acknowledges that the customer lists, trade secrets, processes, methods, and technical information of the Corporation and any other matters designated by the President or by the written consent of all Shareholders are valuable assets. Unless he or she obtains the written consent of each of the other Shareholders, each Shareholder agrees never to disclose to any individual or organization, except in authorized connection with the business of the Corporation, any customer list, or any name on that list, or any trade secret, process, or other matter referred to in this paragraph while the Shareholder holds, or has the control of, any shares of the Corporation, or at any later time.
Article 5 – Distributions of Income and Losses
This section makes sure the shareholders have the same expectations in terms of when they can get money out of the business and ensure that distributions do not undermine the financial needs of the company.
Determination of Net Income and Loss. The net profits or net losses of the Corporation for each fiscal year will be determined on an accrual basis in accordance with generally accepted principles of accounting.
Retaining Net Income. The Corporation will retain [RETAINED INCOME THRESHOLD] ($[RETAINED INCOME DOLLAR AMOUNT]) of its net income, plus any additional amount the Shareholders reasonably believe necessary to meet financial needs of the Corporation, including, but not limited to the development or expansion of its business.
Regular Distributions of Net Income. Subject to any retained earnings and to the statutory requirements related to corporate distributions, the net income of the Corporation may be distributed quarterly to the Shareholders in proportion to the number of shares of the Corporation owned by them.
Such distributions shall be approved by all Shareholders.
Shareholders may elect to not take a distribution, but instead offer the moneys as a loan to the Corporation.
Article 6 – Shareholder Loans To The Corporation
Loan conditions.
A Shareholder may issue a loan to the Corporation upon approval by all Shareholders and only under the following conditions, unless otherwise agreed upon.
[SHAREHOLDER LOAN CONDITIONS].
Repayment.
Repayment of Shareholder loans by the Corporation shall occur when the Shareholders agree that there are enough corporate funds to pay the loan.
Loans to Shareholders shall be paid in order of priority with the oldest loan being paid first, unless the Shareholder waives such write to first payment.
Article 7 – Dissolution of Corporation
Things happen in business and whether voluntarily or because of failure of the business, dissolution procedures should be agreed upon in advance to avoid costly disputes later on.
Unanimous consent required.
All Shareholders must consent to voluntary dissolution.
Procedures for dissolution.
On commencement of dissolution proceedings (either by election of all Shareholders or otherwise), the Corporation will cease to carry on business except as necessary to wind up its business and distribute its assets. The President, or any Shareholder or Shareholders appointed by the President, will perform the following acts, as necessary, to wind up the affairs of the Corporation:
Continue the business as necessary for the winding up of the affairs of the C
Carry out contracts and collect, pay, compromise, and settle debts and claims for or against the Corporation (including participating in litigation, whether as plaintiff or defendant relating to the same);
Sell at public or private sale, exchange, convey, or otherwise dispose of all or any part of the assets of the Corporation for cash in an amount considered reasonable by the President, or his or her appointee(s);
Make contracts and take any steps in the name of the Corporation that are necessary or convenient in order to wind up the affairs of the C and/or
Employ agents and attorneys to liquidate and wind up the affairs of the Corporation.
Distribution of assets. As part of the dissolution process, the President, or the President’s appointee(s), will apply the assets of the Corporation in the following order:
To all debts and liabilities of the Corporation in accordance with the law, including the expenses of dissolution and liquidation, but excluding any S
To all Shareholder loans,
To undistributed net profits of the C
To repayment of the purchase price of the shares of the Corporation actually paid by each S and, finally, shou
To the Shareholders in proportion to the number of shares of the Corporation held by each.
Article 8 – Transfer of Shares
Shares Acquired for Investment. Each of the Shareholders acknowledges and represents that he or she has obtained and accepted his or her shares in good faith, for investment and for his or her own account, and not with a view to distribution or resale.
Distribution or resale of shares to outsiders can implicate a myriad of legal regulations that this agreement is not designed to address, that is why this clause is important.
Restrictions on Transfer. To accomplish the purposes of this Agreement, any transfer, sale, assignment, or encumbrance of any of the shares of the Corporation, other than according to the terms of this Shareholder Agreement is void.
Buy-Sell Upon Death of Shareholder.
Upon the death of a Shareholder, the Corporation shall purchase, and the deceased Shareholder’s estate or successor or successors in interest (the ”Deceased Shareholder”), shall sell, all the Corporation’s stock presently owned by such Stockholder.
This sale will be made within sixty (60) days after the appointment of a legal representative for the Deceased Shareholder’s estate.
Buy-Sell for Other Reasons.
A Shareholder may voluntarily sell all the Corporation’s stock presently owned by such Shareholder (“Departing Shareholder”).
Any and all sales hereunder with respect to the Departing Shareholder shall be made within sixty (60) days after written notice of intent to sell served on the Corporation and the remaining Shareholders.
Right of First Refusal.
In the event of mandatory or voluntary buy-sell under this Section, the non-departing or surviving Shareholder shall have the right of first refusal to purchase all shares that would otherwise be repurchased by the Corporation at the purchase price set forth above.
To exercise this right, the non-departing or surviving Shareholders provide written notice to the Corporation no later than ten (10) days prior to the effective date of sale.
Article 9 – Dispute Resolution
Any dispute relating to this Shareholder Agreement, or arising out of or relating to operations of the Corporation, or the rights or obligations of the Shareholders, shall be settled by:
[RESOLUTION OPTIONS].
Panda Tip:
You can select arbitration, mediation, or perhaps a trusted third party.
You may want to also designated where such a dispute would be decided and whether or not the prevailing party would be entitled to attorney fees from the other.
Article 10 – Miscellaneous Provisions
Necessary Acts. All parties to this Shareholder Agreement will perform any acts, including executing any documents, that may be reasonably necessary to fully carry out the provisions and intent of this Agreement.
Notices. All notices, demands, requests, or other communications required or permitted by this Shareholder Agreement (other than routine communication relative to business operations) will be in writing sent to the following:
[CORPORATION]
[CORPORATION ADDRESS]
[CORPORATION CITY], [CORPORATION STATE], CORPORATION ZIP]
[SHAREHOLDER 1]
[SHAREHOLDER 1 ADDRESS]
[SHAREHOLDER 1 CITY], [SHAREHOLDER 1 STATE], [SHAREHOLDER 1 ZIP]
[SHAREHOLDER 2]
[SHAREHOLDER 2 ADDRESS]
[SHAREHOLDER 2 CITY], [SHAREHOLDER 2 STATE], [SHAREHOLDER 2 ZIP]
[SHAREHOLDER 3]
[SHAREHOLDER 3 ADDRESS]
[SHAREHOLDER 3 CITY], [SHAREHOLDER 3 STATE], [SHAREHOLDER 3 ZIP]
[SHAREHOLDER 4]
[SHAREHOLDER 4 ADDRESS]
[SHAREHOLDER 4 CITY], [SHAREHOLDER 4 STATE], [SHAREHOLDER 4 ZIP]
Attorneys’ Fees. In the event of any litigation concerning this Shareholder, the prevailing party shall be entitled, in addition to any other relief that may be granted, to reasonable attorneys’ fees.
Binding on Successors and Assigns. This Agreement will be binding on the parties to the Agreement and on each of their heirs, executors, administrators, successors, and assigns.
Severability. If any provision is unenforceable or invalid for any reason, the remaining provisions shall be unaffected by such a holding.
Governing Law. This Agreement shall be construed according to and governed by the laws of the State of California.
Entire Agreement. This document constitutes the entire Shareholder Agreement of the Corporation and correctly sets forth the rights, duties, and obligations of each Shareholder and of each Shareholder to the other. Any modifications must be in writing and approved by all Shareholders.
Executed on [DATE OF SIGNING] at [CITY AND STATE OF SIGNING].
THE SHAREHOLDERS
_______________________________ _______________________________
[SHAREHOLDER 1]
[SHAREHOLDER 2]
_______________________________ _______________________________
[SHAREHOLDER 3]
[SHAREHOLDER 4]
Related templatesEnforceability of Put Option in Shareholders Agreement
or a Share Subscription Agreement
For a clearer understanding the meaning of ?Put Option? is required to
be probed into.
A ?Put Option? as understood in common parlance is an option to sell. A
?Put Option? is an Investor?s exit/liquidity option by way of which an
Investor can, on the happening of a ?Put Trigger? event, compel the
promoter/ shareholder of Company to buy its shares either wholly or
partly, at a valuation, agreed between the parties. A ?Put Option? has
become a popular exit option in business practice and has found expression
by way was a ?Put Option? Clause in Share Holders Agreement (SSA) or Share
Subscription Agreements (SHA). This right to sell is not vested in a
shareholder by way of law but is a creation of contractual arrangement
between the parties. Thus if ?Put Option? is not provided in the SSA or
SHA then the investor/ shareholder cannot exercise such right to sell.
The only way the legality of Put Option can be questioned is whether a
contract which provides an option to the Investor to sell his shares to
the Promoter at a consideration fixed on a date where the performance is
to be done on a later date, amounts to a ?forward contract? which is
prohibited under Securities Regulation Act, 1956.
For a comprehensive understanding of this issue the concepts ?restriction
on transfer of shares?, meaning of ?forward contract?, meaning of ?spot
delivery contract?, ?applicability of SCRA to private limited companies,
listed public limited companies, unlisted public limited companies?, is
required to be probed into.
For the convenience of presentation this issue is dealt from the
perspective of a) Private Limited Companies, b) Listed Public Limited
Companies, and c) Unlisted Public Limited Companies.
Legality of Put Option in Share Subscription Agreement and Share
Holders Agreement of Private Limited Companies.
One of the requirements as envisaged in the meaning of Private Limited
Companies is that there must be some restriction on the transferability of
shares. It has always been agreed by the Courts that the restriction upon
transfer of shares means any restriction on the transfer of shares which
will give some control to the Company over transferability . The
restriction must apply to all shares and to classes of shares and not to
some shares or classes of shares only. No shares can be free from transfer
restrictions.
The only permissible restrictions on transferability of shares are those
contained in the company?s article of association. An additional
restriction not contained in the articles but in a private agreement
between two shareholders which places further obstacles in way of
transferability is not binding on either the company or the shareholders.
Thus a promoter can be restricted from transferring his shares in a
private limited company by way of a private agreement i.e. an SSA or SHA
or SSA cum SHA which contains restrictive clauses like ? Put Option?, ?Tag
Option?, ?Drag Option?. However care should be taken that the provisions
of the private agreement are incorporated the AOA of the company.
Further Securities Contract (Regulation) Act, 1956, does not apply to
Private Limited Companies. This has been held in catena of judgments. In
Dahiben Umedbhai Patel and others v. Norman James Hamilton and others it
was held that shares of a private limited company were not marketable
securities as defined in Section 2(h) of the SCRA. The learned Judge
observed that a marketable security is one which enjoys a higher degree of
liquidity and must, therefore, be such that it can be readily sold in the
market and since the shares of a private limited company cannot be sold
and also cannot be listed in the stock exchanges because one of the basic
requirement of the listing of shares is that the shares must be freely
transferable. Since the shares of private limited company are not freely
transferable therefore it does not come under the purview of SCRA as the
purpose of the Act was to control securities which were normally dealt on
the stock exchange, that is to say Public Limited Companies.
Thus since SCRA has no application to the Private Limited Companies a
private company can enter into forward transactions of shares.
Legality of Put Option in SSA and SHA of Listed and Unlisted Public
Limited Companies
Free transferability of shares of public companies is a great beneficial
feature of incorporation. It ensures permanent capital to the company,
while at the same time ensuring liquidity of the shareholder?s investment.
The shares of public companies are made generally freely transferable
without there being any need for taking permission from the company or any
other agency. To facilitate this, shares or any other interest of a
shareholder in a company has been declared by law as a movable property,
transferable in the manner provided by the Articles of Association of the
vide section 82 of the Companies Act, 1956. While free
transferability was thus assured, till recently the companies were
permitted to place reasonable restrictions on transferability of shares in
their Articles subject to the condition that a company could not
completely prohibit the transfer of shares, as the law itself had given
the right of such transfer. Similarly, the Articles could not impose some
onerous terms which would make the right of transfer an illusory right.
The Companies Act did not restrict the grounds on which a company could
refuse to register a transfer of shares. However, in the case of listed
companies, the Board of Directors could refuse to register a transfer on
only one or more of the four grounds mentioned in section 22A of the
Securities Contracts (Regulation) Act, 1956.
Further it was common for the companies to provide in their Articles that
the Directors could at their absolute and uncontrolled discretion decline
to register any transfer of shares.
Thus the legal position till recently has been that while shares of a
listed public company were generally transferable freely, the companies
were allowed to provide in their Articles power to their Boards to refuse
the registration of the transfer of shares on the grounds mentioned in
section 22A of the Securities Contract (Regulation) Act. In view of the
aforementioned judgments, this power of refusal of shares had to be
exercised in a bona fide manner in the interest of the company and the
general body of shareholders. An aggrieved transferee of shares was
entitled to appeal against the refusal of the company to transfer of
shares to the company Law Board under section 111 of the Companies Act.
However, this legal position has changed with the depository system coming
into existence.
The Depositories Act, 1996 has changed this position in
the following manner:
? A new section 111A has been inserted in the Companies Act, which shows
that the shares (or debentures) of a public company, and any interest
therein, shall be freely transferable.
? Section 22A of the Securities Contract (Regulation) Act which inter alia
specified the grounds for the refusal of registration of transfer of
shares by a company has been omitted completely.
? By inserting subsection (14) in section 111 of the Companies Act, it is
now provided that the power to refuse registration of transfer of shares
and appeal against such refusal, shall be applicable only to the private
companies. Thus, public companies have no power to refuse registration.
? Due to newly inserted subsection (3) in section 108 of the companies
Act, transfer of shares can now take place between a transferor and
transferee directly in the records of the depository without following the
detailed procedure under section 108 (of submitting transfer form, etc.)
if both of them are entered as beneficial owners in the records of a
depository.
? Other consequential changes have been made through section 41(3) of the
Companies Act, section 10 of the Depositories Act, etc.
In view of these changes in the relevant laws, it is clear that the shares
of a public company have now been made freely transferable fully. In fact,
where the shares of a public company have been dematerialized, the
transfer of such shares takes place in the records of the depository
itself, without there being any need to make a reference to the company or
its registrar. The depository is required under section 13 of the
Depositories Act to furnish information about the transfer of securities
in the names of the beneficial owners to the company at regular intervals.
Moreover, section 10 of the Depositories Act requires maintenance of a
register and an index of the beneficial owners, a copy of which is
supplied to the company at the time of dividend payment, rights or bonus
issue, etc.
A public company cannot now refuse to register transfer of shares in view
of the aforesaid changes in the law. Any existing provision in the
articles of a public company empowering its Board to refuse registration
of transfer of shares on any grounds, whatsoever, shall be void.
However, the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997 which prescribe the manner in which a person can acquire
more than 5% shares of a listed company (by filing disclosures to the
company) or more than 15% shares of a company (by making a public
announcement of his intention) continue to be valid. Thus, while a company
does not now have a right to refuse registration of transfer of shares, a
substantial acquirer of shares will have to follow the procedure as
mentioned in the said Regulations, which is mainly aimed at ensuring
greater transparency in the substantial acquisition of shares and the
takeovers of companies.
Thus the only restriction on transfer of shares in a Public Limited
Company is the contract for transfer of shares must not be a ?Forward
Contract? and compliances under the Takeover Code must be carried out.
Further in Mysore Fruit Products Ltd. and Others v. The Custodian and
Others it was held that since the shares of Unlisted Companies are
?marketable? in nature therefore SCRA will be applicable to unlisted
public companies. Thus all the consequences applicable to Listed Public
Limited Company will follow in respect of an Unlisted Public Company.
In Rajendra Rathore v. M.P. Stock Exchange, it was noted that:
The stocks and shares in the Exchange are dealt in three ways: (i) Forward
Contracts(ii) Ready delivery contract and (iii)Spot Delivery Contracts.
Forward contracts are contracts under which the parties agree for their
performance at a future date. These contracts sometimes also carry the
risk of degenerating into speculative transactions amounting to pure
gambling which could subvert the main object of Stock Exchange. That is
why the Securities Contract (Regulation) Act, 1956 was enacted to prevent
undesirable transactions in securities by prohibiting certain business
action and by providing for some other connected matters.
A ?spot delivery contract? means a contract which provides for, (a) actual
delivery of securities and the payment of a price therefore either on the
same day as the date of the contract or on the next day, the actual period
taken for the despatch of the securities or the remittance of money
therefore through the post being excluded from the computation of the
period aforesaid if the parties to the contract do not reside in the same
(b) transfer of the securities by the depository from the account of a
beneficial owner to the account of another beneficial owner when such
securities are dealt
Admittedly a notification dated 27th June, 1969 has been published by the
Central Govt. which reads as follows:
S.O. 2561. In exercise of the powers conferred by Sub-section (1) of
Section 16 of the Securities Contracts (Regulation) Act 1956 (42 of 1956)
the Central Government, being of opinion that it is necessary to prevent
undesirable speculation in securities in the whole of India, hereby
declares that no person, in the territory to which the said Act extends,
shall, save with the permission of the Central Government, enter into any
contract for the sale or purchase of securities other than such spot
delivery contract or contracts for cash or hand delivery or special
delivery in any securities as is permissible under the said Act, and the
rules, bye-laws and regulations of a recognised stock exchange:
Provided that a contract other than a spot delivery contract or contracts
for cash or hand delivery or special delivery in any securities on the
Cleared Securities List of a recognised stock exchange may be entered into
between its members or through or with any such member for the purpose of
closing out or liquidating all existing contracts entered into, upto the
date of this notification and remaining to be performed after the said
date, but such contracts shall be subject to the rules, bye-laws and
regulations of the recognised stock exchange that come into force when
further new dealings are prohibited in any securities on the Cleared
Securities List and subject also to such terms and conditions, if any, as
the Central Government may from time to time impose.
Conclusion
Thus according to the abovementioned notification if a contract for sale
of shares is effected on a ?spot delivery basis? then such contract will
be valid and enforceable. Since sale of shares by one shareholder to
another shareholder through a depository amounts to a ?spot delivery
contract?, if an arrangement is made where the sale of the shares in the
event of exercise of a put option by the investor is routed in a demat
form through a depository the exercise put option would not be violative
Opting for this kind of arrangement will rule out the possibility of sale
of shares by exercising put option from being brought within the purview
?forward contract? as even though there may be an element of the price of
the shares, as on the date of sale of shares being predetermined by way of
the valuation mechanism it would still be a spot delivery contract.
However this conclusion can only be derived if a strict interpretation of
the meaning of ?spot delivery contract is taken?. However if a restrictive
interpretation is resorted to then a problem can arise where sale of
shares by way of put option even though it is routed a depository can be
can be considered to be a ?forward contract? if the court comes to the
conclusion that price of the shares has been fixed at a date earlier than
the date on which the shares are to be actually delivered.
Thus the issue that a contract for sale of shares where a valuation
mechanism is such that in effect the price of the shares, which are to be
sold on the date of exercise of put option, is fixed even though such
amount has not been expressed in the form of figures will amount to a
forward contract or not is still an open issue.The author can be reached at:& /
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