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| Shareholders Agreements |
Shareholders Agreement
Shareholders Agreement is an agreement among owners (shareholders) of either an S or C corporation. It regulates contractual relationship between owners, and reflects their mutual relations, including the rights and obligations of the corporation. Not all shareholders may enter into a Shareholders Agreement, though.
Charter Documents vs. Shareholders Agreement
Unlike charter or incorporation documents, such as the articles of incorporation and bylaws, that bind all shareholders, only those who are signatories are bound by the stipulations of the Shareholders Agreement. While charter documents are required to be filed with state authorities and be open for public scrutiny, Shareholders Agreement is a private document and do not need to be open to the public.
If there is conflict between Shareholders Agreement and articles of incorporation, the former will prevail over the latter, but only among shareholders who are parties to the Shareholders Agreement. Since charter documents are open to the public, all third parties who come into contact with the company are bound by them. Shareholders Agreement, on the other hand, is generally not binding to third parties, even if they may be aware of its existence.
Common Provisions of the Agreement
Some stipulations relating to shares in a Shareholders Agreement may include the composition of equity in the corporation, the types of shares, guidelines on allotment and/or transfer of shares, and specifications of rights attached to the shares. The agreement may also deal with issues as regards the company's Board of Directors, such as Board composition, its proceedings, the process for selecting directors, voting mechanisms and documentation of agreements. Issues on non-competition and confidentiality may also be included in the agreement.
A number of these issues are often regulated and addressed in the corporate bylaws, but further inclusion in a Shareholders Agreement gives shareholders who are parties to the Agreement a right to institute action against each other in case of breach of any of its provisions.
The preparation of the Shareholders Agreement is a complex process. A review of the charter documents and any other agreement affecting shareholders is a must in the preparation of the agreement. Engaging the services of a lawyer who has expertise in corporation law saves you from the disputes arising from the agreement at a later date.