A Shareholders Agreement (SHA), as its name implies, is a legally binding contract among the shareholders of a company. Beyond simply governing the rights and obligations of each shareholder, this agreement also typically outlines crucial aspects such as dividend preference obligations, voting rights, the structure of the board of directors (including how each shareholder can nominate directors), and the procedures by which a shareholder can sell their stake in the company. Furthermore, it establishes the rules and regulations governing the shareholders’ interactions amongst themselves and their overall relationship with each other.

When are shareholder agreements executed?

Shareholder agreements are typically put in place in two key scenarios:

First, they are often created and signed by the initial shareholders (founders) at the very beginning, when the company is first being established.

Second, they are commonly executed when the company receives external professional investment, involving new shareholders joining the existing ones.

The fundamental purpose of a shareholders agreement is to provide a layer of protection for all shareholders involved while clearly defining their roles and rights as owners of the company. It fosters confidence among shareholders by ensuring they are treated fairly and equitably. Additionally, it allows the existing shareholders to collectively make decisions regarding potential future shareholders, thereby establishing safeguards, particularly for those holding minority positions within the company.