Entrusted Shareholding Agreement: Everything You Need to Know
An entrusted shareholder agreement is a formal agreement between certain shareholders and a corporation in which so-called “dummy” shareholders.3 min read
2. Entrusted Shareholder Agreement Requirements
3. Risks of Entrusted Shareholder Agreements
4. Shareholder Agreement Frequently Asked Questions
Entrusted Shareholder Agreement Overview
An entrusted shareholder agreement is a formal agreement between certain shareholders and a corporation in which so-called “dummy” shareholders—or more officially, registered shareholders—will hold the shares of a different major shareholder for a specified period of time. In doing so, they will assume both the liabilities and the rights of the shareholder for so long as they serve as the registered shareholder.
Entrusted Shareholder Agreement Requirements
To be valid, an entrusted shareholder agreement should detail the following:
- The company’s name and address.
- The shareholder’s names and addresses.
- The percentage of shares to be allocated to each shareholder.
- The place and date of the agreement’s creation.
- The length of the agreement.
- The conditions under which the agreement may be terminated.
Shareholders involved in such an agreement must acknowledge or present certain financing documents, such as:
- The exclusive consulting and service agreement.
- The share disposition agreement.
- The share pledge agreement.
- The business operation contract.
- The power of attorney between dummy shareholders.
All shareholders and all other parties involved must be in complete agreement on all points for the agreement to move forward.
Risks of Entrusted Shareholder Agreements
Entrusting others to hold shares for you can be a risky enterprise. The following are the main risks that doing so can entail:
- The status of dormant shareholder is not officially recognized; only the status or registered shareholder is.
- It is not easy to change the status of dormant shareholder to registered shareholder.
- The registered shareholder could intentionally damage the interests of the dormant shareholder.
- The registered shareholder could also have their shares executed by the court or frozen if it serves their purposes.
To counter these risks, the following steps are highly recommended:
- Have significant liquidated damages set into an entrustment agreement and have that agreement notarized; these liquidated damages will deter the registered shareholder from acting against the dormant shareholder’s interests.
- Notify other shareholders and concerned parties about the entrusted shareholder agreement so that they may in turn notify you if anything is amiss with the handling of your shares.
- Keep detailed records of all transactions with the entrusted shareholder, as well as any relevant documents, such as the contribution certificate, entrustment agreement, and shareholder’s resolution.
- Clearly define what rights the registered shareholder will have, whether they be dividend rights, voting rights, or others. Written approval should provided to entrust these rights.
Above all though, one should be sure that the parties they are entering into agreement with are highly trustworthy individuals.
Shareholder Agreement Frequently Asked Questions
Those considering entering into a shareholder agreement may and perhaps should have many questions. Some common questions pertaining to such agreements are as follows:
- When will a shareholder agreement end? Either when all parties involved agree for it to end, or on a specific, pre-arranged date. The first option is only really practical when there are few parties involved; for larger agreements, a pre-arranged date is better. Ten years is a common term for shareholder agreements.
- Must a shareholder agreement be filed? No. A shareholder agreement is a private agreement between two parties, just like any other business contract. You are not required to file any paperwork with the state.
- What are preemptive shareholder rights? These give shareholders the right to buy new shares issued by the corporation before non-shareholders may. This allows existing shareholders to maintain their percentage of corporate ownership, although it can also cause long delays in the public sale of shares.
- What is right of first refusal? This allows all other shareholders the right to purchase a shareholder’s shares before they are offered for sale to non-shareholders. These shares will be offered at a pro-rata basis.
- What are piggyback rights? Piggyback rights, also sometimes referred to as a tag-along clause, allow minority shareholders to require their shares to be sold to a buyer if that buyer plans to buy out a majority shareholder of the company. This allows minority shareholders to avoid being in business with a party they do not wish to be in business with. The downside is that it can cause a long delay in the sale of shares.
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