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Why do you need a shareholder agreement?


A Shareholder Agreement is a contract made between the shareholders of a company. It describes rights and obligations of the shareholders as well as states the general operations of the company. It also describes the powers or duties of shareholders which include:

  • An oversight role over the directors/ management of the company
  • Attending board meetings that are organized by the directors
  • Passing of resolutions by voting in board meetings

A person or a legal entity can become a shareholder of a company in three ways, that is; by subscription of shares during incorporation of the company by the promoters, by investing in newly allotted shares in the company, and by transfer of shares through purchase, gift or by a will.

A shareholder agreement is very important because;

  • It protects the rights of shareholders, especially those of minority shareholders.
  • Further, it makes sure that shareholders are treated fairly.
  • It is also important because it outlines the legitimate pricing of shares, the number of issued shares in the company, the percentage of ownership, the transfer of shares and its restrictions, preemptive rights of the existing shareholders and the particulars of payment in the event of company sale.
  • It is important to note that shareholders are the owners of the company and they provide capital injection in exchange of dividends. Therefore, shareholder agreement comes in to state the capital contribution of each shareholder and the same will translate to the dividends to be paid to them.
  • A shareholder agreement outlines the rights and obligations of shareholders
  • It limits the shareholder’s liability only for the price they paid for the shares
  • It protects shareholders from involuntary dilution of their shares in the company
  • It sets the valuation of shares intended to be disposed to an incoming shareholder

Therefore, the person or legal entity would be required to enter into a shareholder agreement to become a shareholder in any of the ways listed above.

How can we assist you?

We can advise you on ways of managing, negotiating and drafting Shareholder Agreements for your business. Please contact us for our services at info@netsheria.com or visit our website at https://netsheria.com/ for more on our services.

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