What is a shareholder agreement and what are the 3 most important things to include in your shareholder agreement? The shareholder agreement is a written contract between the parties who are starting or investing in a business. It’s purpose is to clarify what the parties originally intended and clearly establish the roles and rights of each party. That way, as time passes, the business develops and becomes more complex, the original goals and terms of the shareholder agreement may remain intact.
If disputes are to arise down the road, the shareholders agreement serves as one of the best ways to resolve these disputes. Because it’s in writing, these agreements force the shareholders to address hypothetical (or ‘what if’) scenarios to determine what action will be taken in the event that one of these scenarios arises. It allows decisions to be made when heads are clear and emotions aren’t involved.
There are many things that should be considered or included in a shareholders agreement. Your business model or industry will no doubt present issues specific to that model or field that should be addressed, but there are a number that are universal. Here are the 3 most important things to include in your shareholder agreement:
1. Management of your business
Who can be a shareholder? Who can serve on the board of directors? What is the distribution of responsibility? Will one partner being doing more of the work? If so, it might be worth creating an Employment Agreement to ensure that ‘working’ shareholder is adequately compensated from income before dividends are split up.
2. Buying out one partner’s shares
In the event of situations such as death, divorce or disagreement, it would be wise to determine ahead of time what happens to that partner’s shares. What would a fair, current price be for the shares? Does the remaining partner get to have first right of refusal?
3. Resolving disputes
How will shareholder disputes be handled in the event that shareholders with equal ownership rights disagree on a course of action? Defining a neutral third-party (such as an attorney or other officer) to serve as a board member with a small, but tie-breaking percentage of voting power might be a solution.
When clearly defined in advance, these 3 most important things to include in your shareholder agreement can help you avoid lingering disputes over issues that can cripple a company. Having legal council that can advise you on how to best answer these and other questions when drafting a shareholder agreement is a huge part of a successful business experience. Let the Watkins Firm help you in the process. We invite you to contact us or call 858-535-1511 to speak with one of our experienced attorneys.