A shareholder agreement is important in that it sets out the decision-making authority and restricts or broadens the power of the directors where necessary, and protects certain officers and directors when making decisions on behalf of the corporation against possible derivative actions of other shareholders, whether they are minority, majority or equal shareholders.
Further, a well-drafted, thoughtful shareholder agreement not only prevents shareholder disputes but also provides a framework and procedure for dispute resolution. Establishing a shareholder agreement often facilitates the process of raising finance from banks and demonstrates to potential shareholders, corporate executives and/or investors that the business is stable and well organized. The shareholder agreement, along with the bylaws, ensures stability because it prevents disruption and changes in the company’s situation when one shareholder’s personal circumstances change. For instance, shareholder agreements safeguard each shareholder’s financial interest in the company, and the interests of the shareholders’ families in the event of death. Finally, shareholder agreements protect the rights of minority shareholders and the investment value of the holding. Without this type of agreement in place majority shareholders may act against the minority shareholders’ interests.