What Shareholder's Agreement Gives You?

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Author: Graff

Article source: http://www.articlealley.com/. Used with author's permission.

Shareholders agreement becomes necessary when the rights and duties of shareholders prescribed by the law and other regulations are thought to be insufficient. In fact, in a limited company, each share carries a prescribed number of votes. As a rule, all the shares are of the same class known as ordinary shares. All these ordinary shares carry one vote each. That clearly shows that the majority shareholders control the company.

When such is the case, shareholders of many companies do not remain happy with the traditional rules and regulations. Instead, they like to use a shareholders agreement, which provides a more equal distribution of power and ensures protection for the minority against the exploitation of the majority of shareholders.

Shareholders agreement grants a few rights to the concerned party. They are: the option to put their stakes to their partners or to call their parents stakes, in part or in whole, at a strike price that is typically equal to 'fair' value. It also allows the parties, tag-along rights or co-sale agreements. This enables the parties to demand of a trade buyer to buy their partners' stakes in the same way their partner can.

Then shareholders agreement provides drag-along right. It allows the parties to force their partners to join them in selling their stakes to a trade buyer in case of a trade sale. In addition to that it sanctions demand rights or registration rights that allows the parties to force their partners to agree to take the firm public in an IPO. The next right is the piggy-back; it allows the parties to demand to be included in an IPO in proportion to their stakes in the organisation.

shareholder agreement also provides catch-up clauses; its purpose is to maintain the parties' claims to part of the pay off from a trade sale or an IPO when the parties have ceded their stakes to their partners following the partner's exercise of a call option. These are, in short, the rights allowed to the parties by Shareholders agreement.

About the Author: The Author is an experienced writer presently writing on topics like Company Formation UK for taking business services to establish a company.