Shareholders’ Agreements

Shareholders’ agreements allow business owners to engage in a kind of pre-emptive problem solving and help to ensure that the owners know what their rights are and act to protect the continuation of the business. When a company is owned by multiple individuals or groups, it is important that those owners have an efficient way to solve various disagreements or disputes that may arise, regardless of their personal, or familial, relationship. The bottom line is that unless the company has only one shareholder, the owners should consider the benefits that a shareholders’ agreement offers.

Shareholders’ agreements can address as many potential management or ownership issues as the owners themselves can imagine. In fact, when working with an advisor to implement a shareholders’ agreement, the owners may be surprised by the number of potential conflicts that the agreement contemplates. The breadth of conflicts the advisor may bring up is not because the advisor is a pessimist, but rather is to highlight areas of conflict that commonly arise. While the agreement is tailored to the particular circumstances of the owners, there are a number of standard areas that should be addressed.

The agreement should identify who is going to run the company and what the scope of their authority will be. Further, the agreement should set out if and, if applicable, how these individuals will be compensated. This can, of course, be changed at a later date, but it is useful to initially set out the collective understanding. Generally, agreements will also address administrative matters such as who the accountant will be, if audited financial statements will be required, and issues concerning the holding of shareholders’ and directors’ meetings.

The bulk of the agreement will focus on more complex issues. Examples of what may be addressed include whether there will be share transfer restrictions; whether on an owner’s death the shares can be gifted to that owner’s spouse or children, or whether the surviving owners will buy out the deceased owner’s interest; whether in the event of incapacity or illness an owner will receive disability payments or will be bought out; whether owners will be expected to contribute future capital or personally guarantee the business loans; whether owners who may leave the business will be restricted from competing with the company; and what the exit strategy will be in the event that the owners can simply not continue on together.

During the days when a company is running smoothly and everyone is getting along, it may be difficult for owners to understand why they should spend time and money in developing a legal agreement on how they will handle a whole variety of problems that may or may not ever arise. However, it is at exactly this time that shareholders’ agreements should be made. Just like the child who is told she can slice the cake, but that it is her friend who will get to choose her slice first, owners who are asked to agree on how to settle problems without knowing what their role or interests will be in the future will typically come to equitable solutions.

This article is intended for information purposes only and is not intended to be legal advice.  We suggest you contact a lawyer for advice on your particular business and circumstance.