A shareholder agreement is a legally binding contract between a corporation and its shareholders that define the relationship between them. It can also supplement the corporation’s constitution by adding other rules and regulations not specifically covered in the charter. Before signing the agreement, the shareholder must be given notice of its inclusion in the business’s records. There are two ways to get this notice: first, through a formal communication that the company submits to the shareholders at least ninety days before the contract is entered into; second, by mailing a copy of the agreement to each shareholder at least ninety days before it is entered into.
If the shareholders decide to sue the corporation for breaches of fiduciary, damages, or other claims based on the contents of the shareholder agreement, the case may be filed in one of two ways. If the defendant does not respond to the complaint, the plaintiff can file a civil suit in state court. If the defendant files a motion to dismiss, the plaintiff must proceed with the lawsuit in state court, except that the damages may be recovered only after the defendant has filed its answer. Also, in most states, the statute of limitations on the damages claims is three years from the date the breach of fiduciary began. If, however, the case is settled outside state court, then the provisions of the shareholder agreement will apply.
Before a shareholder agreement is legally binding, both corporations and their officers must prepare and submit the document to the authority vested in that by law. This includes the Board of Directors and other officers of the corporation. In addition, the officers must sign the document. If there is a shareholder meeting to discuss a proposed amendment to the Articles of Organization or to change the control or ownership structure of the corporation, the officers must attend and sign the document.
To have a shareholder agreement in place, a corporation must: meet the statutory requirements for incorporating, hire an attorney to prepare the documents, and submit them to the appropriate authority. The process is much more complicated if the corporation is a publicly held company. The corporation must file its annual and financial statements with the appropriate government agencies.
The primary reason for creating a shareholder agreement is to protect the rights of existing shareholders. All shareholders should agree on the percentage of ownership that they want to attain and how that percentage is determined. They should also create a mechanism to determine that debt is repaid by receiving new shares of stock. Any deviation from this commitment must be approved by the Board of Directors. Once these obligations have been fulfilled, a new shareholder will be entitled to receive capital gains tax rebates on the outstanding balance of shares.
What They Include
The shareholder agreement will specify the method by which additional funds will be received, including by purchasing an option for shares at a stated price. This is typically done by amending the initial purchase price. The options are typically referred to as premium penny stocks.
Each shareholder’s agreement will list the damages that may be awarded if the Corporation’s fiduciary duties are found to have been breached. This section may also add requirements for insurance protection from lawsuits against the Company. Substantial monetary damages may be awarded to the Named Pleasure Party if it is found the breach of fiduciary duty caused actual damages. Some states limit the damages awarded to shareholders. Others allow for triple damages.
Sometimes a shareholder agreement will be included as a condition of a purchase of a Company’s common stock. This occurs when a shareholder is a member of a company that is not publicly held and cannot buy their shares. Other companies require members to sign shareholder agreements when they become members. Other parties involved may include the sponsor of a fund or affiliate marketers.