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Shareholders Agreement

Can we use a standardized shareholders agreement?

Can we use a standardized shareholders agreement? 150 150 Jiang Hong Wilkin Business Law

Some clients request the template shareholders’ agreement and want to simply change the name and date of the shareholders’ agreement. This should never be done. Each company has its own situation. A shareholders’ agreement is prepared and customized for each company. One agreement good for one company may not apply to another company. For example, if the operation of a company depends on the CEO significantly, its shareholders’ agreement therefore requires the company buy life insurance for the CEO. Does another company also need to buy life insurance for its CEO? Another example, a shareholder’s agreement requires that a fundamental transaction be approved by more than 70% of voting shares. Does this 70% apply to another company? What if the minority shareholder hold 20% of shares of the company? If still using 70% in the shareholders’ agreement, there will be no protection for the minority shareholder. Generally speaking, the shareholders’ agreement will govern the shareholders for many years and the shareholders should be very careful with each term and make sure they understand all the terms and conditions of the shareholders’ agreement.

Why should you have a shareholders’ agreement?

Why should you have a shareholders’ agreement? 150 150 Jiang Hong Wilkin Business Law

Unless a company has only one shareholder, there should be shareholders’ agreement. Especially for minority holders, their interest cannot be protected without a shareholders’ agreement. Majority holders control the board of directors, and minority holders cannot join the board without a shareholders’ agreement.

Majority holders can do whatever they want, and minority holders have no opportunity to intervene. For example, a minority holder bought 10 shares at $1000 per share (in total $10,000). Thereafter, the board of directors may issue to the majority holders 1000 shares at $ 1 per share (in total $ 1,000). The board of directors may appoint the son of the majority holder as the CEO with annual salary of $500,000. The minority holder has no way to intervene, rather than going to court. Moreover, there is no way to exit the company. The minority holder cannot sell his shares without the consent of the majority holders. If shares held by the minority holder is less 33.34%, the majority holders can sell company’s assets, merge with other company, or dissolve the company without the consent of the minority holder. Therefore, there should be a shareholders’ agreement when becoming a minority holder of a company. It is better to sign the shareholders’ agreement while making the investment. If you already became a shareholder, it is still recommended to enter into a shareholders’ agreement as early as possible. Otherwise, it will be to too late once the relationship between shareholders breaks down.

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