Shareholder Agreements And The Protections Surrounding Them

If you already have obtained shares in a company or you are thinking about purchasing shares in a company, do you know the risks involved? What about the perks? Do shareholders have rights, and if so, how do you protect them once you have them?

After achieving shareholder status, you must review the shareholders’ agreement (if there is one in place) with careful expertise. Each deal varies, but typically the agreement should provide several essential details that follow similar lists as depicted below:

• Duties the shareholder has to the company
• Obligations the company has to its shareholders 
• Mission or purpose of the company’s intent on how it will be ran
• Roles and rights
• Voting rights
• Handling of disputes amongst shareholders
• How to buy out shares to the company 
• How to sell shares of the company 
• Process in which to handle the loss of a shareholder due to an unforeseen happening (death, divorce, incapacitated)

Because upon entering a shareholders agreement, understanding your rights and obligations provides insight should you need to exit the company. You would be doing so within the confines of the agreement. Reviewing the agreement carefully bodes well to understand the agreement should questions arise about anything that you do not understand. 

As noted in the previous points above, signing, reading, and understanding are only the beginning of the work. Protection comes next and is the most critical facet of being a shareholder; you need to stay informed and execute communication effectively, knowing when and not to take action. Having a list to follow to preserve your rights during your agreement is shown below:

1. Educate yourself to know who is on the company’s board. Be sure to realize the company’s overall purpose and what it is trying to achieve (Long and short-term goals). Understand what direction the company is headed in and be proactive about any problems that may arise in the future. 
2. Know your board, officers, and directors. The three significant duties that the board of directors owes to its shareholders are:
   1. The duty of care
      1. Good use of companies assets, people, and goodwill
   2. The duty of loyalty
      1. Making decisions in the best interest of the company 
   3. The duty of obedience 
      1. Abiding by the companies bylaws and regulations
3. Understand your shareholder rights and, most importantly, the right to vote. Voting is the most fundamental right that a shareholder has. It allows them to be a part of major company decisions, buyouts, changes in leadership, and potential mergers. A few more rights as followed:
   1. The right to pro-rata ownership of company assets
   2. The right to dividends
   3. The right to the portion of the profit that the company pays out
   4. The right to transfer shareholder ownership
   5. The right to inspect books, records, and corporate documents
   6. The right to sue if bylaws are breached or something illegal (This usually comes by way of a class action suit)
4. Be a part of the bi-monthly meetings and communicate. Shareholders meetings usually are held periodically throughout the year to inform agendas and action items, bylaw changes company budget, and an annual plan. If something raises a red flag at the meeting or you suspect decisions are being made that are not in the company’s best interests or are illegal, seek legal advice.

Becoming a shareholder in a company comes with certain rights and responsibilities. Being an informed shareholder will help you spot potential risks in advance and minimize your exposure. Suppose you need help understanding a shareholder’s agreement or are concerned about the actions of your board of directors. In that case, we have a team of lawyers able to assist you—from contract interpretation to bringing litigation. Contact Enara Law today at 602-687-2010 or email us at [email protected] to set up a free consultation.