Drafting a Shareholder Agreement (US)

Note: Want to skip the guide and go straight to the free templates? No problem - scroll to the bottom.
Also note: This is not legal advice.

Introduction

Shareholder agreements are legally-binding documents designed to protect the interests of both the company and its shareholders, by setting out the rights, obligations and responsibilities of each party. Without one in place, shareholders can find themselves in a precarious situation with no protection or recourse.

At Genie AI, we understand how essential it is to have a shareholder agreement in place. That’s why we’ve developed the world’s largest open source legal template library, in order to provide free shareholder agreement templates for anyone who wants them. Our millions of data points teach our AI what a market-standard agreement looks like – enabling anyone to draft and customize high quality legal documents without paying for a lawyer’s assistance.

A good shareholder agreement should lay out each party’s rights and obligations clearly – including voting power, decision-making authority and profits’ allocation – as well as rules on selling shares and how disputes will be resolved. It also serves to protect the company itself; defining individual shareholders’ roles helps ensure that the firm’s interests are represented properly at all times.

Moreover, with an effective shareholder agreement in place, conflicts between parties can be resolved quickly and fairly through established procedures. Put simply: having such an agreement provides crucial protections for all concerned - both individuals involved as well as the company itself.

Getting your shareholder agreements right is essential; it requires understanding of complex laws which can have far-reaching implications if not drafted correctly. That’s why engaging expert help when creating these vital documents is so important; at Genie AI you will find step-by-step guidance on all aspects of drafting your own shareholder agreement - plus immediate access to our template library - so you can take advantage of this essential tool without breaking the bank! Read on below for more information today…

Definitions (feel free to skip)

Ownership Structure: A set of conditions that assigns rights and responsibilities to shareholders regarding their ownership in a company.

Voting Rights: The authority granted to shareholders to cast votes on company matters.

Management Responsibilities: The duties that shareholders are responsible for in the running and oversight of a company.

Liquidating: A process of selling off a company’s assets in order to pay out its creditors.

Transferring Ownership: The process of moving ownership of shares of a company from one shareholder to another.

Obligations: The duties and responsibilities that one has to another party.

Best Interests: What is in the most beneficial outcome for the company.

Legal Requirements: The laws and regulations that a company or an individual must abide by.

Preference Rights: The authority given to shareholders to receive certain benefits or privileges before other shareholders.

Participation Rights: The authority given to shareholders to receive a share of the dividends or other benefits from a company.

Dividends: The payments made to shareholders from the profits of a company.

Voting Rights: The authority granted to shareholders to cast votes on company matters.

Shareholder Classes: Different groups of shareholders who have different rights and privileges.

Confidentiality Clause: A provision in a contract that prevents the sharing of confidential information with third parties.

Non-Compete Clause: A provision in a contract that prevents parties from engaging in activities that could be damaging to the other party.

Dispute Resolution: The process of settling disagreements between parties.

Contents

• Overview of Shareholder Agreements
• Defining Your Goals and Objectives
• Defining ownership and control
• Establishing the length of the agreement
• Defining the roles and responsibilities of each shareholder
• Understanding Your Rights and Responsibilities as a Shareholder
• Understanding your obligation to act in the best interests of the company
• Understanding the legal requirements that you must adhere to as a shareholder
• Setting Preference and Participation Rights
• Determining the rights of each shareholder with regards to dividends, liquidation and other events
• Establishing voting rights for each shareholder
• Defining Shareholder Classes and Voting Rights
• Defining the different classes of shareholders
• Establishing the voting rights of each class
• Establishing Ownership Shares and Transferability
• Determining the number of shares each shareholder will own
• Establishing the rules for transferring ownership of shares
• Setting the Terms of Buyouts and Liquidation
• Establishing the terms of a buyout or liquidation
• Setting the timelines for buyouts and liquidation
• Agreeing on Confidentiality and Non-Compete Clauses
• Defining the confidential information that cannot be shared
• Establishing a non-compete clause
• Addressing Dispute Resolution
• Establishing a dispute resolution process
• Defining the roles of the parties involved in the dispute resolution process
• Finalizing the Agreement and Signing Process
• Finalizing the language of the agreement
• Ensuring all parties involved agree to the terms of the agreement
• Signing the agreement

Get started

Overview of Shareholder Agreements

• Research the purpose of a shareholder agreement
• Understand what elements and provisions should be included in a shareholder agreement
• Know the common clauses of a shareholder agreement
• Understand the limits of a shareholder agreement
• Determine if a shareholder agreement is necessary for your business
• When you have a clear understanding of the purpose and elements of a shareholder agreement, you can move on to the next step of defining your goals and objectives.

Defining Your Goals and Objectives

• Make a list of the goals and objectives you hope to accomplish with the shareholder agreement
• Consider the needs of shareholders, and the company itself when crafting these goals
• Make sure that the interests of the company and its shareholders are in agreement
• Identify any potential conflicts of interest between shareholders, and how they can be managed
• When you have a list of goals and objectives, ensure that all shareholders agree to them and sign off
• You can check this step off your list when all shareholders have agreed to the goals and objectives laid out in the shareholder agreement.

Defining ownership and control

• Determine how much of the company each shareholder will own (percentage or shares)
• Specify whether or not shareholders can transfer their shares
• Decide if the company will have a single class of shares or multiple classes
• Define which shareholders will have control over major decisions (e.g. issuing new shares, major investments, hiring, board appointments, etc.)
• Once you have defined these parameters, you can move on to the next step.

Establishing the length of the agreement

• Determine the length of the agreement and include it in the document
• Specify if the agreement will continue in perpetuity or if it will expire on a certain date
• Set rules on how to renew or extend the agreement, if desired
• Include any provisions that allow shareholders to terminate the agreement
• Once all the relevant provisions have been included, you can move on to the next step of defining the roles and responsibilities of each shareholder.

Defining the roles and responsibilities of each shareholder

• Identify the roles of each shareholder such as directors, officers, employees, and investors.
• Draft a list of the responsibilities for each role and assign specific tasks to each shareholder.
• Specify the conditions for each role, such as term limits, voting rights, and compensation.
• Have a lawyer review the agreement to make sure that all roles and responsibilities are clear and legally binding.

You can check off this step when you have identified the roles of each shareholder, drafted a list of responsibilities, specified the conditions for each role, and had a lawyer review the agreement.

Understanding Your Rights and Responsibilities as a Shareholder

• Understand the conditions of the shareholder agreement that you are a party to
• Become familiar with the rights and responsibilities of a shareholder under the agreement
• Learn about the fiduciary duties you owe to the company and its other shareholders
• Identify any restrictions on the transfer of your shares, voting rights, or the exercise of other rights
• Be aware of any restrictions on how you can use the company’s confidential information
• Understand the process for electing directors and shareholders
• Understand the process for amending the shareholder agreement

When you can check this off your list:
You can check this off your list when you have read and understood the rights and responsibilities of a shareholder under the shareholder agreement.

Understanding your obligation to act in the best interests of the company

• Research and understand the relevant fiduciary duties that you must adhere to as a shareholder
• Understand that your primary obligation is to act in the best interests of the company
• Familiarize yourself with the rules of corporate governance and the role of the board of directors
• Understand your rights and responsibilities as a shareholder and the implications of any action taken
• Ensure that you are properly informed and educated about the company’s plans and operations
• When you have a good understanding of the company, its operations, and your obligations, you can move on to the next step.

Understanding the legal requirements that you must adhere to as a shareholder

• Become familiar with the state laws that apply to your company. Each state has its own specific laws and regulations governing shareholders.
• Understand the fiduciary duties that all shareholders owe to the company and other shareholders.
• Review the company’s Articles of Incorporation to determine what rights and obligations you have as a shareholder.
• Research and understand the rules governing the issuance of new shares.
• Familiarize yourself with the relevant tax laws that may be applicable to you as a shareholder.

Once you have become familiar with the legal requirements, you can move on to the next step of setting preference and participation rights.

Setting Preference and Participation Rights

• Identify the types of voting rights each shareholder will have
• Establish the amount of control each shareholder can have over the business
• Specify the type of voting rights that each shareholder will have regarding major decisions
• Determine the level of information each shareholder will have access to
• Decide if shareholders will have the right to inspect corporate books and records
• Agree on the percentage of ownership each shareholder will have
• Determine if any shareholder has the right to appoint directors
• Establish the rules for any additional shareholders joining the company

When you have agreed on the preference and participation rights of each shareholder, you can check this off your list and move onto the next step.

Determining the rights of each shareholder with regards to dividends, liquidation and other events

• Outline the rights of the shareholders concerning any potential dividends
• Decide whether these will be proportional to the number of shares each shareholder holds
• Determine the rights of each shareholder when there is a liquidation event
• Set out the rights of the shareholders in the event of a merger, acquisition or other corporate event
• Specify the rights of each shareholder in the case of a dissolution or bankruptcy
• Set out the rights of the shareholders in the event of the issuance of additional shares.

When you can check this off your list and move on to the next step:

• Once you have determined the rights of each shareholder with regards to dividends, liquidation and other events and documented them in the Shareholder Agreement, you can move on to the next step: Establishing voting rights for each shareholder.

Establishing voting rights for each shareholder

• Set out the voting rights of each shareholder class in the agreement
• Consider whether each class should have one vote per share, or if different classes should have different voting rights
• Identify voting rights for special matters, such as the appointment of directors, and the approval of major decisions or transactions
• Include provisions for the approval of any future changes to the voting rights of each class

When you have set out the voting rights of each class, you can move on to defining shareholder classes and voting rights.

Defining Shareholder Classes and Voting Rights

• Identify and define the different classes of shareholders, such as common and preferred
• Assign voting rights to each class of shareholder
• Decide if there are any other special rights or privileges associated with any class of shareholders
• Record the agreement regarding shareholder classes and voting rights in the shareholder agreement
• Once the agreement regarding shareholder classes and voting rights has been drafted and agreed upon by all parties, you can move on to the next step of drafting the shareholder agreement.

Defining the different classes of shareholders

• Research the different types of shareholders available and decide which classes are best suited for your company
• Define the rights, privileges, and obligations of each class based on their legal status
• Draft the specific language to ensure that each class is legally distinguishable in the shareholder agreement
• Review the language with legal counsel to ensure that it is legally binding
• When you are satisfied with the language and legal counsel has approved, you can check this step off your list and move on to the next step.

Establishing the voting rights of each class

• Decide on the rights of each class of shareholders, including the number of votes each share will represent
• Determine whether voting will be cumulative or non-cumulative
• Consider if there are any special voting rights that need to be included, such as a super- majority
• Record the voting rights of each class of shareholders in the shareholder agreement

Once all the voting rights have been established and documented in the agreement, you can move on to the next step of establishing ownership shares and transferability.

Establishing Ownership Shares and Transferability

• Establish the respective percentage ownership of each shareholder in the company.
• Determine whether the ownership shares in the company are freely transferable or if they are subject to restrictions.
• Identify any limitations on the transfer of ownership shares, such as rights of first refusal, option rights, and drag-along rights.
• Decide if there will be any restrictions on the sale of shares to outside parties, such as a right of first refusal for existing shareholders.
• Draft a clause in the agreement addressing the transferability of ownership shares.

You’ll know when you can check this off your list and move on to the next step when you have addressed each of the issues listed above and drafted a clause in the agreement regarding the transferability of ownership shares.

Determining the number of shares each shareholder will own

• Calculate the total number of shares in the corporation.
• Decide the percentage of ownership each shareholder will have.
• Divide the total number of shares in the corporation according to the ownership percentages.
• Document the number of shares each shareholder will own in the shareholder agreement.
• Once the number of shares each shareholder will own is documented, you can move on to the next step.

Establishing the rules for transferring ownership of shares

• Create a document outlining the rules for transferring shares, including how, when, and to whom ownership of shares can be transferred
• Consider including what is and is not allowed in terms of giving shares as gifts, mortgaging shares, or selling them
• Include the provisions for how to handle a shareholder’s death, bankruptcy, or incapacity
• Include a voting agreement specifying which shareholders will have the right to vote and how decisions will be made
• Outline the restrictions that may be placed on the transferability of shares
• Include any provisions for the payment of a fee or other consideration when a shareholder transfers shares
• Review and approve the agreement with all shareholders
• Once all shareholders have signed the agreement, you can check this step off your list and move on to the next step.

Setting the Terms of Buyouts and Liquidation

• Establish a buyout agreement for the shareholders in the event of the sale or dissolution of the company
• Decide on the method of valuation for the company when it comes to buyouts or liquidations
• Specify the payment terms for any buyouts and liquidations
• Establish the timeline for any buyouts or liquidations
• Specify the buyout or liquidation preferences for each shareholder

Once all the terms of buyouts and liquidations have been set, you can move on to the next step.

Establishing the terms of a buyout or liquidation

• Decide who will be in charge of the buyout or liquidation process
• Identify what method will be used to distribute the proceeds of a buyout or liquidation
• Set out the conditions that must be met in order to complete a buyout or liquidation
• Agree on the payment terms for any buyout or liquidation
• Decide how disputes related to a buyout or liquidation will be handled and resolved
• Determine who will be responsible for paying any taxes and other costs related to a buyout or liquidation

Once you have completed these tasks and all parties agree to the terms of a buyout or liquidation, you can move on to setting the timelines for any buyout or liquidation.

Setting the timelines for buyouts and liquidation

• Determine the timeline for buyouts, based on the company’s needs and the shareholders’ expectations.
• Put the timeline in writing in the agreement.
• Set a deadline for notification of a desire to buyout or liquidate.
• Agree on the timeline for payment of the buyout or liquidation amount.
• Include provisions for extensions of the timeline if the shareholders agree to it.
• Once you have drafted and agreed on the terms of the buyout or liquidation timeline, you can move on to the next step.

Agreeing on Confidentiality and Non-Compete Clauses

• Draft a confidentiality and non-compete clause that will protect the company’s proprietary and confidential information
• Include language that prevents the shareholders from competing with the company
• Negotiate with the shareholders to ensure that the clause is mutually agreed upon
• Incorporate the confidentiality and non-compete clause into the shareholder agreement

You can check this off your list when the confidentiality and non-compete clause has been negotiated, agreed upon, and incorporated into the shareholder agreement.

Defining the confidential information that cannot be shared

• Identify the information that is confidential and proprietary to the business, such as customer lists, trade secrets, and financial information
• Spell out which types of information should be kept confidential and protected in the agreement
• Decide who should have access to the confidential information and under what circumstances
• Determine what actions should be taken if a breach of the agreement occurs
• Specify the penalties for any breach of the agreement
• When the agreement is complete, be sure to have all shareholders sign and date it

Once you have identified the types of information that need to be kept confidential, outlined who should have access to it, and determined what the consequences are for any breach of the agreement, you can check this step off your list and move on to the next step of establishing a non-compete clause.

Establishing a non-compete clause

• Include language that prohibits shareholders from using any confidential information, both during and after their time with the company
• Stipulate that shareholders may not directly compete with the company in any way, such as through a similar business or services
• Specify the geographical range of the non-compete clause and the length of time it will remain in effect
• Outline any exceptions that could be made to the non-compete clause
• Make sure that all shareholders involved in the agreement understand and agree to the non-compete clause

You will know when you can check this step off your list and move on to the next step when all shareholders have signed the agreement and agreed to the non-compete clause.

Addressing Dispute Resolution

• Include a dispute resolution clause which outlines how disputes between shareholders will be resolved
• This clause should identify the dispute resolution process to be used in the event of a disagreement between shareholders
• This could include arbitration, mediation, or litigation depending on the preferences of the shareholders
• The clause should also contain a deadline for each step of the process
• Once the clause has been added to the shareholder agreement, it can be checked off the list and the next step can be completed.

Establishing a dispute resolution process

• Decide on the type of dispute resolution process to use (e.g. arbitration, mediation)
• Draft language that details the dispute resolution process and other related matters such as cost, location, and time limits
• Set out the roles of each party involved in the dispute resolution process
• Negotiate and agree on the terms of the dispute resolution process
• Include the agreed upon dispute resolution process in the shareholder agreement
• Once all parties have agreed to the dispute resolution process and it has been included in the shareholder agreement, you can check this step off your list.

Defining the roles of the parties involved in the dispute resolution process

• Identify the roles that each party will have in the dispute resolution process.
• Outline the duties and responsibilities of each party in the dispute resolution process.
• Establish a procedure for notification of a dispute and the process for resolution.
• Describe the roles of any third parties such as mediators and arbitrators.
• Detail the remedies that the parties may seek in the event of a dispute.

Once all the roles of the parties in the dispute resolution process have been identified and outlined, you can check this off your list and move on to the next step.

Finalizing the Agreement and Signing Process

• Have all parties involved in the agreement sign and date the final document.
• Ensure that all signatures are witnessed and notarized (if necessary).
• Create a digital copy of the agreement and store it securely.
• Make sure that each party has a physical copy of the agreement.
• You can check this off your list once all parties have signed and dated the agreement, and you have created a digital copy and each party has a physical copy.

Finalizing the language of the agreement

• Read through the entire agreement and make sure each party’s interests are represented
• Amend the document based on any comments or suggestions from the various parties
• Finalize the language of the agreement by making sure the terms are clear and unambiguous
• Ensure all parties involved are in agreement with the document and its terms
• Have the agreement reviewed and approved by a lawyer or legal professional
• When all parties are in agreement and the language of the agreement is finalized and reviewed, you can check this step off of your list and move on to the next step.

Ensuring all parties involved agree to the terms of the agreement

• Have each individual party review the agreement and make sure they understand and agree to its terms
• Schedule a meeting with all parties involved to discuss the agreement and answer any questions they may have
• Have each party sign the agreement in person or electronically
• Collect the signed agreements for all parties

Once all parties have signed the agreement and it has been collected, you can check this off your list and move on to the next step.

Signing the agreement

• Ensure the agreement is signed by all shareholders, or by a representative who has been given the authority to sign.
• Draft a signature page where all shareholders must sign.
• Have the signatures notarized, if needed.
• Once all shareholders have signed the agreement, have each shareholder receive a copy of the signed agreement.
• When all shareholders have signed the agreement and received a copy, the agreement is complete and binding.

FAQ:

Q: What are the differences between a US and UK shareholder agreement?

Asked by David on May 10th, 2022.
A: A shareholder agreement for a company in the United States will typically be different from an agreement for a company in the United Kingdom. Generally speaking, US laws are more relaxed than UK laws when it comes to shareholders’ rights and obligations. For example, US agreements tend to have fewer restrictions on shareholders’ ability to transfer their shares and fewer requirements for shareholder approval for certain decisions. Additionally, US agreements often include provisions for arbitration or mediation of disputes between shareholders, while UK agreements tend not to include such provisions.

Q: How can I make sure my shareholder agreement is enforceable?

Asked by Matthew on August 4th, 2022.
A: To ensure that your shareholder agreement is enforceable, you should make sure that it is properly drafted and tailored to your particular company’s needs. You should also make sure that all relevant parties have signed the agreement. Additionally, it is important to keep the agreement up-to-date as laws and regulations can change over time. Finally, it is important to have a lawyer review the agreement before signing it to ensure that it meets all legal requirements and is properly tailored to your particular business’s needs.

Q: Are there any special considerations I need to keep in mind when drafting a shareholder agreement for a SaaS company?

Asked by Emma on June 18th, 2022.
A: When drafting a shareholder agreement for a SaaS company, there are certain considerations you should keep in mind. For example, SaaS companies may need to include provisions in their agreements governing the use of customer data and intellectual property rights. Additionally, since SaaS companies often rely on subscription revenue streams, it is important to include provisions regarding ownership of subscription revenue and how profits will be distributed amongst shareholders. Finally, since SaaS businesses are often reliant on technology platforms and software updates, you should include provisions regarding how ownership of such updates will be handled in the event of a dispute between shareholders.

Q: What are the implications of having two or more classes of shareholders?

Asked by Christopher on November 14th, 2022.
A: One implication of having two or more classes of shareholders is that it can lead to potential conflicts of interest between different classes of shareholders. Additionally, having multiple classes of shareholders can lead to complex decisions regarding how profits should be allocated amongst different classes of shareholders. It can also lead to situations where one class of shareholders may have more control over decisions than another class. As such, it is important to consider all potential implications when drafting a shareholder agreement that includes multiple classes of shareholders.

Q: How do EU regulations affect my shareholder agreement?

Asked by Jessica on October 17th, 2022.
A: Depending on the jurisdiction in which your company operates, EU regulations may have an effect on your shareholder agreement. Generally speaking, EU regulations require that any shareholder agreements comply with applicable consumer protection laws and regulations as well as other relevant EU directives such as those governing data protection and competition law. Additionally, EU regulations also require that any shareholder agreements contain provisions protecting minority shareholders’ rights and interests as well as provisions governing how profits will be distributed amongst different classes of shareholders (if applicable). As such, it is important to ensure that any shareholder agreements you draft comply with applicable EU regulations in order to ensure their enforceability.

Q: What happens if I don’t have a shareholder agreement?

Asked by Michael on April 13th, 2022.
A: If you do not have a shareholder agreement in place then the default legal position applies – meaning that the board has exclusive authority over major decisions affecting the company (unless otherwise provided for in company law). This means that individual shareholders cannot challenge board decisions and have no right to information about the company’s affairs or financial performance unless granted such rights by board resolution or under relevant legislation (e.g., Companies Act 2006). Additionally, without a shareholder agreement in place there is no mechanism in place for resolving disputes between shareholders so any disputes would likely be resolved through lengthy and costly legal proceedings. As such, it is generally advisable to have a tailored shareholder agreement in place in order to protect all parties involved and provide certainty around decision-making processes and dispute resolution mechanisms within the company.

Example dispute

Possible Lawsuits Referencing Shareholder Agreement

• A plaintiff may raise a lawsuit that references a shareholder agreement if they feel that the agreement has been breached or violated.
• For example, if a shareholder agreement stipulates that profits or losses must be shared equally among shareholders, but one shareholder has received more than their share, the other shareholders could sue for breach of the agreement.
• The plaintiff must be able to prove that the agreement was breached and that they suffered some sort of damages due to the breach.
• The plaintiff may also be able to receive punitive damages if the breach was intentional or grossly negligent.
• The plaintiff may seek an injunction, which is a court order requiring the defendant to comply with the agreement.
• The plaintiff may also seek restitution, which is a court order requiring the defendant to return what was taken from the plaintiff or compensate the plaintiff for losses suffered due to the breach.
• The plaintiff may also be able to receive damages for lost profits.
• The court may also award attorney fees, court costs, and other expenses associated with the lawsuit.

Templates available (free to use)

Nominee Shareholder Agreement
Shareholder Agreement For Employees

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