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FAQ: Business Organizations and Transactions

What is a shareholder agreement?

To protect their shares, shareholders sometimes unite by contract through shareholder agreements to dictate how these shareholders may use joint actions for the benefit of their shares. The validity of the agreements depends on what has been provided for in the state statutes under which the corporation was formed.

Courts generally uphold voting agreements unless they contravene public policy or perpetrate a fraud or undue influence on shareholders not participating in the agreement. Most jurisdictions require the agreement to be in writing and state the specifics of the arrangement, and many jurisdictions also require that a copy of the agreement is filed with the corporation to put other shareholders on notice.

Shareholder agreements are interpreted like any other contract. Courts will apply the rules of contract construction and interpretation when judging the validity of shareholder agreements.

Types of Shareholder Agreements

Shareholders can form agreements that dictate what actions they may take when voting their shares. The following are forms of shareholder agreements:

Vote pooling agreements: Shareholders contract to vote in one block. Because voting is typically within the powers of a shareholder, these agreements are usually valid.

Irrevocable proxies: Shareholders designate an agent, the proxy, to vote the shareholders' shares at an election. Shareholders cannot revoke their proxies once they have been designated. Statutes governing proxies sometimes limit their duration or only permit use of a proxy for one annual meeting.

Voting trusts: Shareholders transfer their stock to a trust, and a trustee votes for the stocks in the trust in a voting block. Once parties to the trust have transferred shares to the voting trust, most states view the trusts as irrevocable unless all parties consent that the shares may be removed from the trust.

Shareholder control agreements: Shareholder control agreements are typically valid if they determine powers that are traditionally shareholder powers, for example, agreements on voting shares. Courts have invalidated shareholder control agreements that purport to control powers that are held by directors or officers, such as agreements that attempt to control management of the corporation.

What is required to create a shareholder agreement?

No particular form is necessary to create a shareholder agreement, but some jurisdictions require the parties to write and sign a shareholder agreement. To be valid, the agreement should specifically state the terms of duration. The shareholder agreement should also explain its scope and purposes.

Some jurisdictions may require the parties of a shareholder agreement to file the agreement with the corporation to put other shareholders on notice of its existence.

What types of shareholder agreements are illegal?

While shareholders are permitted to contract with each other on how they will vote their shares, certain contractual goals are not permitted. If a shareholder agreement contemplates fraud on another shareholder, it will be void and illegal. Shareholders owe each other a fiduciary duty, thus shareholder agreements must be for the benefit of all shareholders. Similarly, shareholder agreements that have an illegal act as the purpose are void and illegal.

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