A shareholder agreement sets out the decision-making authority and restricts or broadens the power of the directors where necessary. This legal agreement also protects certain officers and directors when making decisions on behalf of the corporation against possible derivative actions of other shareholders, regardless of whether they are minority, majority or equal shareholders.
A thoughtful shareholder agreement prevents shareholder disputes and provides a framework and procedure for dispute resolution. Having a shareholder agreement in place often helps the process of raising money from banks and demonstrates to potential shareholders, executives and investors the business’ stability and organization. The shareholder agreement, along with the bylaws, ensure the company’s stability because they prevent disruption resulting form one shareholder’s personal circumstances change. For example, shareholder agreements protect the shareholders’ financial interest in the company, and the interests of the shareholders’ families, in the event of death. It also protects the rights of minority shareholders and the investment value of the holding. Without a shareholder agreement, majority shareholders would have the ability act against the will of the minority shareholders’ interests.