As companies grow, bring in investors, and restructure ownership, founders often hear the same question from counsel and investors:
“Does this belong in the Certificate of Incorporation or in the Shareholders’ Agreement?”
The distinction matters. Some rights must be embedded in the company’s governing documents to be enforceable against the corporation and future shareholders. Others belong in private agreements that can evolve as ownership changes.
Understanding where different provisions belong is essential to clean governance, enforceability, and future financings.
1. The Role of the Certificate of Incorporation
The Certificate of Incorporation (or Amended and Restated Certificate of Incorporation) is the company’s public, state-filed charter. It defines the corporation’s legal existence and fundamental capital structure.
Because the Certificate binds the corporation and all shareholders—present and future—it is the proper place for structural rights that attach to the stock itself.
Items That Typically Belong in the Certificate of Incorporation
Authorized Capital Structure
• Total number of authorized shares
• Classes and series of stock
• Par value (if any)
Economic Rights
• Liquidation preferences
• Dividend rights (or lack thereof)
• Participation rights
• Conversion rights (e.g., preferred to common)
Voting Rights
• Class voting requirements
• Protective provisions requiring class or series approval
• Supermajority voting thresholds tied to specific stock classes
Anti-Dilution Provisions
• Broad-based or narrow-based weighted average adjustments
• Conversion price mechanics
Redemption Rights (When Required to Be Charter-Based)
• Mandatory or optional redemption tied to the stock itself
Certain Drag-Along Mechanics
• When drag rights are embedded as stock attributes rather than contractual covenants
These provisions must live in the Certificate because they define the rights of the shares themselves, not merely obligations among the current owners.
2. The Role of an Amended Certificate of Incorporation
As a company raises capital—especially in Seed, Series A, or later rounds—it often adopts an Amended and Restated Certificate of Incorporation.
This document:
• replaces the original charter,
• integrates preferred stock terms,
• and ensures new investors’ rights are enforceable against all shareholders.
Investors typically require key economic and voting protections to appear in the Certificate so they cannot be amended or bypassed by later private agreements.
3. The Role of the Shareholders’ Agreement
A Shareholders’ Agreement (SHA) is a private contract among shareholders (and often the company) that governs behavior, transfers, and relationships, rather than the intrinsic rights of the stock.
Unlike the Certificate, the SHA:
• does not bind future shareholders unless they agree to it,
• can be amended by contractual consent thresholds,
• and is often tailored to the current ownership structure.
Items That Typically Belong in a Shareholders’ Agreement
Transfer Restrictions
• Right of First Refusal (ROFR)
• Right of First Offer (ROFO)
• Co-sale (tag-along) rights
• Restrictions on transfers to competitors or non-permitted holders
Board Composition and Governance Mechanics
• Board designation rights
• Observer rights
• Procedures for filling vacancies
Drag-Along Obligations
• Contractual obligations requiring shareholders to support a sale
• Voting and consent mechanics tied to a transaction
Information Rights
• Financial reporting obligations
• Inspection rights beyond statutory minimums
Founder and Key Holder Obligations
• Vesting arrangements
• Lock-ups
• Non-competition and non-solicitation covenants (where permitted)
• Confidentiality obligations
Exit and Liquidity Provisions
• IPO cooperation covenants
• Secondary sale limitations
• Buy-sell provisions in closely held companies
These terms govern how shareholders act, not what their shares inherently represent.
4. Why the Distinction Matters in Financing and M&A
Misplacing provisions can create real problems:
• A liquidation preference in a Shareholders’ Agreement may be unenforceable against future shareholders.
• Transfer restrictions placed only in the Certificate may be too rigid for evolving ownership.
• Investors may refuse to close if protections they expect in the charter appear only in a private agreement.
• Acquirers and underwriters scrutinize whether rights are properly embedded in the company’s governing documents.
Clean document allocation also makes diligence smoother and reduces renegotiation during financings.
5. How This Plays Out in Early-Stage and Growth Companies
In early startups, founders often rely heavily on private agreements. As the company matures:
• Economic and voting rights migrate into the Certificate
• Behavioral and transfer rights remain in the SHA
• The operating documents become layered, not redundant
By Series A, it is common to see:
• a comprehensive Amended Certificate of Incorporation,
• a Shareholders’ Agreement,
• a Voting Agreement,
• and a Right of First Refusal and Co-Sale Agreement.
Each document has a distinct role, and mixing them creates unnecessary friction.
Conclusion
The Certificate of Incorporation defines what the shares are.
The Shareholders’ Agreement governs how shareholders behave.
Understanding that division—and drafting accordingly—keeps corporate governance clean, enforceable, and investor-ready. Companies that place terms in the wrong document often pay for it later during financings, exits, or disputes.
Getting it right early simplifies growth and preserves flexibility as ownership evolves.
