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China Shareholder Agreement

China shareholder agreement


Often the time international business people or investors need to jointly invest with Chinese local business entity or individual to comply with China local laws and regulations. This is why often the time a shareholder agreement is needed before international business enter into China market. In this blog article, we introduce what is a shareholder agreement in China, why you need a shareholder agreement, and why you need a lawyer to draft the shareholder agreement for you.

What is Shareholder Agreement

A shareholder agreement sets out the terms of how corporate shareholders will interact with each other and what happens if one or more want to get out of the business, or something happens that forces exit of a shareholder or shutdown of the company.

The people who buy these shares become the company’s shareholders, but it is important for the company to remember that it cannot simply take money from shareholders without granting rights in return. Because shareholders are investing their money in the shares they purchase, they have rights as investors which need to be protected.

Since every company has a different relationship with its shareholders, a shareholder's agreement can provide clear guidelines for how the company is to treat the shareholders and what rights and responsibilities are granted to the shareholders.

Importance of a Shareholders' Agreement

Each year, many promising businesses are derailed by internal conflicts. These conflicts often arise as a result of difficult economic and trading conditions but more commonly arise where parties have differing expectations from the company.

The maxim prevention is better than the cure has never been more appropriate and the existence of a bespoke Shareholders’ Agreement that specifically identifies the parties’ often conflicting expectations will be invaluable in allowing the company to flourish in a dispute free environment.

Among other things, a shareholder's agreement can specify how much say a shareholder has when choosing the directors of the company and whether the company can make capital expenditures without approval from the shareholders. Security interests and the company's assets are also of interest to shareholders, since the way that they are used can have an effect on the shareholders' investments.

Because the buying and selling of shares is so important to shareholders, some shareholder's agreements might state when a company can redeem shares, when it can sell more shares, and whether it can sell shares for any sort of compensation other than money. Likewise, a shareholder's agreement might also specify whether a shareholder has any say in who can buy shares of the company, and if so, to what extent.

In some cases, a shareholder's agreement might give shareholders the first opportunity to buy new shares of the company. This gives the shareholders a chance to increase their investment in the company and their potential payout if the company continues to do well.

As people with a vested interest in the company, shareholders also usually want to have a say in whether or not the company can begin working in a new business. As companies grow larger and more successful, they often find ways to branch out and diversify. Whether or not this is something that is in the company's best interest is another matter that shareholders might want to be consulted about. Therefore, regulating this choice to diversify or not is another matter that can be handled by a shareholder's agreement.

A shareholder's agreement can help determine what happens to a shareholder's shares in the event that she dies suddenly or becomes incapacitated. In most cases, the agreement will state whether other shareholders can buy the shares.

In the absence of a Shareholders Agreement it will be very difficult and complicated to clarify shareholders’ rights and directors’ obligations in such circumstances.

What does the Shareholders Agreement cover?

  • Who can be a shareholder
  • Who can serve on the board of directors
  • What happens if one of the shareholders becomes impaired or dies
  • What happens if a shareholders files for bankruptcy, resigns, retires or is fired
  • How much shares of stock are worth
  • Who will be required to purchase the shares of a shareholder who's leaving
  • How much will be paid for the purchase of such shares
  • Management of the corporation
  • Procedural matters
  • Covenants of the corporation
  • Dealing with shares
  • Provisions for the resolution of any future disputes between shareholders

Any time that many people have a mutual interest in something of monetary value, disputes can arise. Whether from personal differences or differences of opinion regarding how the company should be run, a shareholder's agreement can simplify matters by providing guidelines for how disputes are to be handled. In the event that shareholders disagree amongst themselves or with someone in the company to the extent that a third party needs to become involved, the shareholder's agreement can determine whether the dispute is to be resolved in arbitration or mediation. A mediator does not have any power to reach a binding decision in a dispute, but merely helps the two parties to reach a mutually acceptable conclusion. In the event that the mediator is unable to do so, the dispute might continue in the courts. An arbitrator's decision is binding and both parties must agree to abide by the decision before entering into arbitration.

Our Shareholder Agreement Drafting Service and Dispute Resolution Service

The attorneys at our law firm have decades of experience handling shareholder's agreements. With offices located in Oak Brook Terrace and Chicago, Illinois, we have represented shareholders and businesses all over the country. To consult with one of our attorneys today, you can email us online.

At this law firm we can assist in advising on and dealing with negotiations with your business partner and, if required, dealing with the litigated aspects of shareholder disputes.

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I am a licensed China lawyer. Most clients are foreign nationals and companies. China Lawyer Blog have associates in Beijing, Shanghai, Tianjin, Guangzhou, Suzhou, Nanjing, Qingdao, Fuzhou, Hainan, Hefei, Wuhan, Xian, Changsha, Xiamen and Hangzhou. Learn More

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China Lawyer BLog AuthorPeter Zhu, an experienced China attorney licensed to practice law for more than ten years, the author of this China Lawyer blog, welcomes any enquiry or consultation related to Chinese law.