When the shareholders want a well-documented charter of their legal rights and conditions agreed among themselves, it becomes necessary to prepare a shareholder's agreement. This agreement helps to keep the faith in a business partnership or in a shareholding relationship.

As it is, each share can carry a prescribed number of votes in a limited company. Ordinary shares have one vote. And so the majority shareholders would be controlling the company in that case. A shareholder's agreement however, helps provide an equal distribution of power, and in the process ensuring protection for the minority shareholders against the exploitation of the majority shareholders who are so by virtue of their number of votes. The traditional rules and regulations may be insufficient in these cases. Because there is a written document, it avoids confusion as well as gives benefits to the less privileged party, the minority in a shareholder relationship. It determines what stake each partner has in the company and how to manage and allocate the profit and loss percentage to each shareholder.

The shareholder's agreement provides a few rights to the concerned party such as the option to put their stakes to their partners or to call their parent's stakes at a strike price that may be equal to what is considered a 'fair' value. It also allows the parties, tag-along rights or co-sale agreements and drag-along rights. There are other rights, such as the piggy-back. And there are catch-up clauses. You can check out the details of these rights by referring to some good websites.

Apart from names and the stakes the shareholders have in a company, the shareholder agreement also states what the rules to govern end of the association with the company and to deal with disputes. Given the importance and the sensitive information contained in this document and the moderating part it plays, it should be well-protected.