Legal Definitions - shareholders' agreement

A shareholders’ agreement is a legal contract that outlines the relationship between the shareholders and the corporation. This agreement sets out the basic rights and responsibilities of the shareholders and the corporation. It is particularly important for small, closely-held corporations where the shareholders are actively involved in the management of the company.

The shareholders’ agreement typically covers a range of issues, including:

• Voting rights during shareholders’ meetings
• Buying or selling company shares
• The corporation's articles of incorporation and bylaws
• The selection procedure for the board members of the corporation

For example, let's say that a group of friends decide to start a small business together. They form a corporation and each invests an equal amount of money. They want to make sure that they all have an equal say in how the business is run, so they create a shareholders’ agreement that gives each shareholder one vote during shareholders’ meetings. They also agree that if one shareholder wants to sell their shares, the other shareholders have the right of first refusal to buy them.

Another example might be a family-owned business where the shareholders are all members of the same family. They want to make sure that the business stays in the family, so they create a shareholders’ agreement that requires any shares that are sold to be offered first to other family members before they can be sold to outsiders.

Overall, a shareholders’ agreement is an important tool for ensuring that the shareholders and the corporation are on the same page and that everyone understands their rights and responsibilities.