What is a shareholder agreement and what are the most important issues to address in a shareholders’ agreement in San Diego and Southern California? The shareholder agreement is a written contract between the parties who are starting or investing in a corporation.
The purpose of a well-crafted shareholders’ agreement is to clarify the relationship between the parties, the roles, responsibilities and rights of each party and how disputes will be addressed and resolved. That way, as time passes, and the corporation develops and becomes more successful and complex, the original goals and terms of the shareholder agreement will remain clear to the parties, as well as enforceable.
Important Issues to Address in a Shareholders’ Agreement
There are many important issues to address in a shareholders’ agreement. While the nature of your corporation’s business plan will no doubt present issues specific your unique business model, there are a number of common themes that should be addressed in your shareholders’ 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 a working shareholder is adequately compensated before “dividends” are established and distributed. It is important to clearly establish the structure of ownership, the number of outstanding shares and the types of shares being issued, as well as the voting rights associated with each ownership position.
2. Buying out one partner’s shares
In the event of situations such as incapacitation, death, divorce, bankruptcy of an individual shareholder or serious disagreement, it would be wise to determine ahead of time what happens to that partner’s shares. How will a fair current market value of an interest be established? Does one or more of the remaining shareholders get to have first right of refusal and are there any restrictions on the transfer of shares? Other issues to address can include specific buy-sell language, as well as drag-along versus tag-along rights.
3. Resolving disputes
How will a shareholder dispute be handled in the event that an individual shareholder or group of shareholders has genuine issues or concerns? Is there a deadlock resolution provision required and what happens if shareholders with equal ownership and voting 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 potential solution.
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. I can tell you after more than 40 years of experience with corporate documents and shareholder disputes it is crucial to get things right at the outset. If it is in writing up front you will have fewer disputes down the road.
Your Corporate Formation Attorneys and General Counsel in San Diego
When clearly defined in advance, the most important issues to address in a shareholders’ agreement can help you avoid lingering disputes over money and other issues that can cripple a company. Having experienced corporate formation attorneys and general counsel from your Watkins Firm can help to ensure a strong shareholders’ agreement is carefully crafted to reflect the unique aspects of your corporation while protecting the interests of its owners and investors.
We invite you to review our podcast episode 34 – Business Formation as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
