Stockholder Agreement
Best Practice Summary

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Stockholders agreements are designed to protect the company and/or stockholders by restricting certain rights of the stockholders who are party to the agreement, or by imposing obligations on the company toward the stockholders. The term is most commonly used to refer to agreements imposing conditions on the sale of stock by stockholders, but is also used to include agreements by the company to grant special rights to the stockholders such as registration rights, information rights or redemption rights.

Other stockholders' agreements such as a voting trust agreement, proxy agreement or stock pooling agreement. These types of agreements are designed to consolidate stockholder voting power and empower minority stockholders, particularly in the election of directors. All stockholders entering such an agreement are required to act in the manner prescribed in the agreement when exercising their voting rights on all matters covered by the agreement. How votes will be cast is determined by agreement of the majority of stockholders involved, by certain specifically identified persons and/or by a formula described in the agreement.

Some stockholder agreements provide that any new stockholders of the company (or possibly only those who acquire stock of the same class as is owned by the existing stockholder parties) must become parties to the agreement as long as it remains in effect. This is known as a joinder agreement.

Anatomy of a Stockholders' Agreement

Generally, a stockholders' agreement provides:

Stockholders: A stockholders' agreement may provide for certain stockholder rights, such as:

• Buy/sell rights;
  
• Restrictions on transfer and Permitted transfers;
  
• First Refusal Rights;
  
• Participation Rights
  
• Death of a stockholder;
  
• Default or bankruptcy of a stockholder;
  
• Provisions that require supermajority vote such as charter amendments, mergers and acquisitions, repurchase and redemption of shares, declaration of dividends, etc.
• Right to inspect books
• Covenant not to compete

Directors: A stockholders' agreement generally provides for:

• The number of directors and term in office;
  
• Quorum of the board;
  
• Process of election;
  
• Procedure for appointing successors should a director die, withdraw, retire or be removed with or without cause;
  
• Limitation of powers;
  
• Compensation; and
  
• Procedures for calling and holding board meetings.
  

Officers: In a close corporation, a stockholders' agreement may also provide for procedure for electing and replacing officers.

Miscellaneous Clauses

In addition to the general clauses that are contained in any well-crafted agreement such as notices, waivers, severability, counterparts and such, a stockholders' agreement may contain the following miscellaneous clauses:

Provisions for Performance: The agreement may set forth the specific performance of agreement provisions.

Arbitration Clause: The arbitration clause provides for the range of issues to be resolved, the scope of relief to be awarded, the party to pay for the arbitration, and other procedural points.

Legends: Certain legends must be placed on the back of the stock certificates representing the shares subject to the agreement setting forth the notice that the stock is held subject to certain restrictions contained in the stockholders agreement. The legends will typically be set forth in the agreement.

Termination Provisions: Certain events and circumstances that will justify the termination of the agreement may be provided, such as an initial public offering, dissolution or liquidation, sale of substantially all assets, consent of all stockholders.

Joinder Provision: As a condition of transfer, it may be required that any transferee execute and deliver a joinder agreement.

State laws should be checked to assure that all provisions are provided and those provided are in compliance with state law such as majority consent, redemption, election of officers and directors etc.).

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