Shareholders Agreement and Share Purchase Agreement

Shareholders' Agreement

What Is a Shareholders' Agreement?

A shareholders' agreement, also called a stockholders’ agreement, is an arrangement among a company's shareholders that describes how the company should be operated and outlines shareholders' rights and obligations. The agreement also includes information on the management of the company and privileges and protection of shareholders.

The Basics of a Shareholders' Agreement

The shareholders' agreement is intended to make sure that shareholders are treated fairly and that their rights are protected.

The agreement includes sections outlining the fair and legitimate pricing of shares (particularly when sold). It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions.

A shareholders’ agreement includes a date, often the number of shares issued, a capitalization (or “cap”) table, outlining shareholders and their percentage of company ownership, any restrictions on transferring shares, pre-emptive rights for current shareholders to purchase shares (in the event of a new issue to maintain their percentage of ownership), and details on payments in the event of a company sale.

Shareholder agreements differ from company bylaws. While bylaws are mandatory and outline the governing of the company’s operations, a shareholder agreement is optional. This document is often by and for shareholders, outlining certain rights and obligations. It can be most helpful when a corporation has a small number of active shareholders.

Key Takeaways

A shareholders' agreement is an arrangement among a company's shareholders that describes how the company should be operated and outlines shareholders' rights and obligations.

The shareholders' agreement is intended to make sure that shareholders are treated fairly and that their rights are protected.

It also allows shareholders to make decisions about what outside parties may become future shareholders and provides safeguards for minority positions.

Example of a Shareholders Agreement for an Entrepreneurial Venture

Many entrepreneurs creating startup companies will want to draft a shareholders’ agreement for initial parties. This is to ensure clarification of what parties originally intended; if disputes arise as the company matures and changes, a written agreement can help resolve issues by serving as a reference point. Entrepreneurs may also want to include who can be a shareholder, what happens if a shareholder no longer has the capacity to actively own his or her shares (e.g. becomes disabled, passes away, resigns, or is fired), and who is eligible to be a board member.

As with all shareholder agreements, an agreement for a startup will often include the following sections:

A preamble, identifying the parties (e.g. a company and its shareholders)

A list of recitals (rationale and goals for the agreement)

Details of optional versus mandatory buying-back of shares by the company in the event that a shareholder gives his/her up

A right of first refusal clause, detailing how the company has the right to purchase a selling shareholder’s securities prior to she/he selling to an outside party

Notation of a fair price for shares, either re-calculated annually or via a formula

A potential description of an insurance policy

What should be included in a shareholders’ agreement?

This, as described above, will depend on the the number of shareholders and their respective shareholdings.  The key provisions, however, that should be considered for inclusion are those relating to:

Issuing shares and transferring shares – including provisions to prevent unwanted third parties acquiring shares, what happens to shares on the death of a shareholder and how a shareholder can sell shares.

Including any tag along or drag along provisions.

Providing some protection to holders of less than 50% of the shares – including requiring certain decisions to be agreed by all shareholders.

Paying dividends.

Running the company – including appointing, removing and paying directors, frequency of board meetings, deciding on the company’s business, making large capital outlays, providing management information to shareholders, banking arrangements and financing the company.

Competition restrictions.

Dispute resolution procedures.

Share purchase agreement

What is the Share Purchase Agreement?

A Share purchase agreement Format (SPA) is a formal agreement between a purchaser of shares in the company and the buyer, laying down the required terms and conditions. This type of transaction shall include the purchase of a part of the company’s operating business. Upon the transfer of shares as per the agreement’s terms, the ownership shall pass on to the buyer. It shall bring to the buying a certain amount of control and powers in the target business.

Through a Share Purchase Agreement, the buyer steps in the place of the seller. The other elements of the company- contracts, properties, etc do not alter in any manner. A share sale/ transfer thus involve no third party involvement and thus is a discreet transaction. Also, in share sale/ transfer, the seller gives up the liabilities of his part (of debts of the business) to the buyer.

A share purchase agreement is a legal contract between a buyer and a seller -- sometimes stated in the contract as a “purchaser” and “vendor” -- in which the seller sells a stated number of shares at a stated price. The agreement is proof that the sale and its terms were mutually agreed upon.

Who Can Be Parties to the Share Purchase Agreement Format?

SPA may be executed between a single buyer and seller or may be between a single seller and multiple buyers. In case of multiple buyers, if they are companies created only for the purpose of effecting a SPA (or Shell Companies), thus lacking administrative or financial credibility, it is essential to ensure that heads of such companies (or Principals) are made Covenants/Guarantors so as to protect the compensation or payment in cases of non-payment or fraud of any kind.

Who Needs a Share Purchase Agreement?

If a corporation or individual is purchasing or selling shares in the company with another business or person, they should use a share purchase agreement. As an example, if a business has two partners who have equal shares and one leaves the partnership, a share purchase agreement can be used to buy their stocks in the business. When all of the shares are purchased, a purchase of business agreement can be used instead.

Contract

A share purchase agreement is a business contract. A contract lawyer draws up the agreement, and both buyer and seller sign and date the agreement in the presence of two witnesses. By signing the share purchase agreement, both parties acknowledge that the sale will take place in such a way at such a price and under stated conditions.

Purpose

The purpose of a share purchase agreement is to ensure that the deal occurs as both parties expect it to. If either party attempts to change the price or number of shares or impose new or unexpected conditions, the other party can produce the contract, which both parties are legally required to abide by after signing.

Legalese

The National Venture Capital Association states that the main items in a share purchase agreement are the names of the buyer and seller as well as the price and number of shares. Pages of legalese often accompany these items, specifying how the price is determined, how the shares will be paid for and delivered, the transfer of ownership and explicitly removing buyer and seller from any other responsibility toward each other.

Use

Share purchase agreements can be used in any instance in which one person or entity sells shares to another. The agreements are most commonly used when the shares in question are being transferred to entities in two different countries under two different legal systems or when the shares are being sold outside of a standard trading platform or off an exchange.