Do I Need a Shareholders’ Agreement When Forming a Corporation?

A Shareholder’s agreement is among the most important tools for governing shareholder relationships. This private contract defines the rights, responsibilities, and protections of those who invest in and own shares in the business.

While these agreements are not always legally required, they provide clarity and stability from the outset of a corporation’s operations. This is vital for any business with global ambitions, as a carefully drafted agreement can safeguard against disputes, set clear governance standards, and ensure the corporation develops on a stable foundation.

We’ve put together this article to provide global entrepreneurs with insights into what shareholder agreements are, when they’re needed, and how they should be used.

What Is a Shareholders’ Agreement?

A shareholders’ agreement is a private contract entered into by the shareholders of a corporation that establishes how the company will be owned, managed, and governed.

This document is a type of rulebook for the relationship between shareholders and the corporation. It fills the gaps that general corporate law or incorporation documents may leave unaddressed.

The primary purpose of these agreements is to protect the interests of shareholders while clarifying their ownership rights and responsibilities. It also sets clear governance rules for decision-making and ensures that mechanisms are in place for handling disputes, succession, and other major developments in the life of a corporation.

Unlike articles of incorporation or bylaws—which are often required by law and filed with government authorities—a shareholders’ agreement is typically a private document. Its confidentiality allows for more flexibility to be in line with the needs of the shareholders and the specific corporation. This makes it particularly valuable in jurisdictions where statutory corporate frameworks don’t address nuanced ownership or governance elements.

Why a Shareholders’ Agreement Matters for Corporations

One of the primary benefits of a shareholder agreement is establishing clarity around the ownership structure and voting rights. Shareholders have a good understanding from the outset of what percentage of the corporation they own, how those shares are valued, and the extent of their decision-making authority.

These agreements also provide a clear framework for corporate decision-making. They set out how key business choices are to be made—usually through majority or supermajority voting—and ensure that mergers, acquisitions, or the issue of new shares can’t be carried out without proper approval.

Another significant aspect is the protection that agreements give to minority shareholders. Without this in place, smaller investors may be at risk of being overruled by majority shareholders on vital matters. The agreement can require that certain decisions cannot be made without unanimous consent, or it can include clauses that guarantee fair treatment in dividend distributions and exit opportunities.

Furthermore, corporations benefit from the solid continuity that a shareholders’ agreement can provide. In the event of a shareholder’s exit, death, or incapacity, the agreement provides for succession planning. It sets out who may acquire shares, under what conditions, and at what valuation. This prevents disruptive ownership disputes and helps the corporation maintain operational stability.

Key Provisions Typically Found in Shareholders’ Agreements

Some of the common provisions found in shareholders’ agreements include:

• Voting rights and decision-making – This outlines how shareholder votes are allocated, the thresholds required for various types of decisions, and the process for holding meetings or written resolutions. These rules prevent ambiguity in the governance process and help corporations make decisions efficiently.
• Share transfers and exit rules – Shareholders often agree to restrictions on the transfer of shares to ensure that ownership remains within the agreed group or that departing shareholders cannot sell to external parties without approval. Buy-sell clauses are frequently included, allowing existing shareholders or the corporation itself to purchase shares from an exiting party under predetermined terms.
• Dividend policies – The agreement commonly defines when profits are distributed, how dividends are calculated, and under what conditions reinvestment into the corporation is treated as a priority. By setting these expectations, shareholders reduce the risk of disagreements about profit allocation.
• Management roles and responsibilities – In some corporations, shareholders are passive investors, while in others, they take an active role in managing the business. The agreement clarifies these roles, outlining which shareholders hold executive positions, which participate on the board of directors, or who contributes in other defined capacities.
• Dispute resolution mechanisms – These are included to provide a roadmap for resolving conflicts. They may involve internal negotiation procedures, mediation, or arbitration before litigation is pursued. Establishing such mechanisms in advance helps prevent disagreements from escalating into costly and public legal battles.

Do All Corporations Need a Shareholders’ Agreement?

While shareholder agreements are not always legally required, they are certainly highly advisable. In many jurisdictions, corporations are able to operate solely under statutory corporate law and their incorporation documents. However, this often leaves important governance and ownership issues unresolved, which may lead to future conflicts.

For corporations with a single shareholder, a formal agreement may not be immediately necessary. In these cases, the owner controls all decisions, and the risks of dispute are practically non-existent. Yet, as corporations grow and additional shareholders are introduced, the need for a formal agreement becomes more vital. The presence of multiple owners brings with it competing interests. Without a clear framework, disputes can easily arise over decision-making, dividend distribution, or the sale of shares.

Therefore, while not usually legally mandated, a shareholders’ agreement is an invaluable tool for any corporation with more than one shareholder, especially when long-term growth or international expansion is part of the plan.

Alternatives to Shareholders’ Agreements

Although a shareholders’ agreement is specific to corporations, other business structures choose to utilize alternative yet similar governance tools. 

For example, limited liability companies (LLCs) typically rely on operating agreements—making it essential for LLC owners to fully understand what is an operating agreement—which defines the roles and responsibilities of members, as well as rules for profit distribution and management. 

Partnerships, on the other hand, often use partnership agreements that outline the rights and obligations of partners. This certainly features in the various pros and cons of forming a partnership​.

These alternatives serve similar purposes but are specifically aligned with the legal framework of the respective business structure. The main distinction is that while LLCs and partnerships often require such agreements to function effectively, corporations may not. This flexibility can be beneficial, but also highlights the importance of drafting a shareholders’ agreement where multiple owners are involved.

Drafting and Using a Shareholders’ Agreement Globally

Many corporations operate across multiple jurisdictions as the international business landscape becomes more accessible to even small enterprises. This international scope adds a layer of complexity to drafting effective shareholders’ agreements. Legal systems differ in how they treat shareholder rights, dispute resolution, and corporate governance, which means an agreement drafted in one jurisdiction may not have quite the same weight in another.

For corporations with global ambitions, legal precision is essential. Shareholders need to ensure that their agreement is enforceable across the jurisdictions in which the company operates or conducts business. This often requires specialized advice and, in many cases, professional business formation consulting services with experience in coordinating across borders provide invaluable guidance.

As corporations expand internationally, their governance structures tend to evolve. A shareholders’ agreement should be reviewed and updated regularly to reflect these changes, whether they involve new shareholders, cross-border mergers, or expanded business operations.

FAQs

What is a shareholders’ agreement?

A shareholders’ agreement is a private contract between the shareholders of a corporation. It defines their rights, duties, and protections. It also governs how the corporation is managed, providing clarity on ownership and governance.

Is a shareholders’ agreement legally required?

In most jurisdictions, it is not mandatory to have a shareholders’ agreement. However, it is considered essential for protecting shareholder interests, particularly where multiple owners are involved.

Can I use a shareholders’ agreement template?

Templates are available and can serve as a useful starting point. However, they rarely address the specific needs of a corporation operating across borders or within particular industries.

How do shareholders’ agreements protect minority investors?

They provide safeguards such as voting protections, guaranteed profit distribution rights, and clear dispute resolution mechanisms.

When should I create a shareholders’ agreement?

The ideal time is at incorporation or before new shareholders are admitted. Establishing the agreement early prevents disputes and ensures that all parties enter the corporation with a clear understanding of their rights and responsibilities.

What happens if there is no shareholders’ agreement?

In the absence of an agreement, disputes can be more difficult to resolve, and default corporate law rules will apply. These statutory rules may not reflect the intentions or needs of the shareholders, leaving them without effective protections.

References

Duffy, M. (2024, November). Shareholder agreements, the corporate constitution and the oppression remedy. ResearchGate. https://www.researchgate.net/publication/386097474_Shareholder_agreements_the_corporate_constitution_and_the_oppression_remedy 

Miliauskus, P. (2013, January). Shareholders’ agreement as a tool to mitigate corporate conflicts of interests. ResearchGate. https://www.researchgate.net/publication/264821917_Shareholders%27_agreement_as_a_tool_to_mitigate_corporate_conflicts_of_interests