What is a shareholder's agreement

A shareholders agreement, also known as a stockholders agreement, is a legal document that is established between two parties to demonstrate an agreement made amongst shareholders as well as between the shareholders and the company.

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Understanding a shareholder agreement

When forming a company, one of the many tasks that may be required of you is to complete a shareholders’ agreement. Whether or not you will need to complete this requirement will depend on the specific rules and regulations of the jurisdiction that your company is being established in, as many jurisdictions do not require a shareholders’ agreement.

The relationship between the shareholders and the company is usually detailed in the constitutional documents (which are the Memorandum and Articles of Association); however in some cases the shareholders agreement often supplements this document. In the case that a company has a small number of shareholders, it is likely to form a shareholder agreement which is submitted with the other constitutional documents.

Some jurisdictions emphasize the requirement of a shareholders’ agreement, as it acts as a private document that is not available for public viewing. Jurisdictions that offer greater privacy of company operation will generally require a shareholders’ agreement, to ensure that all company activity is kept as private as possible.

Another reason why such an agreement is required is because it ensures that all shareholders are treated fairly and fully within their rights. The agreement also provides them with additional protection.

Further to the above, the agreement provides greater company flexibility in terms of the constitution. In some cases, businesses anticipate regular changes to their constitution and thus having a shareholders’ agreement in place enables them to modify this instead of altering the Memorandum and Articles of Association.