What are the elements of an effective California shareholders’ agreement? Why are the shareholders’ agreement and the corporate bylaws important and crucial documents to get right when forming an S Corporation, C Corporation, Professional Corporation or Management Service Organization?
Key Takeaways About The Elements of an Effective California Shareholders’ Agreement:
- A strong shareholders’ agreement protects your investment and rights, and establishes the duties of the shareholder, any controls over share transfers or buyouts, and dispute management.
- The shareholders’ agreement should specify all rights, pre-emptive rights, the process of valuation, voting rights, access to corporate finances and reports, and the process of elections.
- An important element of the agreement specifies the manner in which any dispute will be managed, and what will happen if there is a “trigger” or important life event for any shareholder.
A Strong Shareholders’ Agreement Protects Your Investment and Rights
The Watkins Firm has decades of experience protecting a minority shareholder’s interest in a San Diego and Southern California corporation. A strong shareholders’ agreement protects your investment and rights, and establishes the duties of the shareholder, any controls over share transfers or buyouts, and dispute management.
Shareholder’s rights are an important part of corporate ownership and stock interests. The Watkins Firm represents individuals and business entities in transactions involving the purchase of corporate stock as well as the acquisition of a company through a stock purchase. If you are purchasing a minority interest in a corporation there are several things you should look for in the shareholder’s agreement:
Pre-emptive Rights – The shareholders agreement should ensure that a minority shareholder has the protected or guaranteed right to purchase any new shares offered by the company. This is important to protect your minority position and the percentage of the company you own and control.
Valuation – Managing the sale of stocks within a corporation is crucial to preserve smooth operations and prevent internal discord. The shareholders agreement should specify a fair and consistent valuation process which establishes the value of stock that is to be sold or transferred.
The Right to Appoint a Director or Officers – a substantial minority interest should have the right to appoint a director or several directors who understand the minority interest’s point of view and can protect their interests. The right to appoint officers or executives ensures the minority interest has access to critical corporate decision making and input over the direction of the company.
Review and Approval of Capital Expenditures – Especially in a small to mid-sized business, capital expenditures require substantial financial resources and may consume a substantial portion of the company’s working capital. Ensure your shareholders agreement provides review, input and approval of capital expenditures.
How Will Shareholder Disputes Be Managed?
One of the other important elements to ensure a strong shareholders’ agreement is an element of succession planning. What happens when something goes terribly wrong in the life of any shareholder? What happens if a shareholder dies or becomes incapacitated? What happens if a shareholder cannot meet the requirements of a capital call? How will the interest of a shareholder be valued in the event of a divorce or personal bankruptcy of one of the shareholders?
If there is a shareholder dispute how will the dispute be managed and in what venue?
Pro-Tip: “When a corporation issues shares or authorizes shares, for example, they’ll authorize 10,000 shares and they’ll issue 1000. So when you buy half of the issued shares, you’re not getting half the company, you’re getting 5% because the other 10,000 are sitting back at the corporate offices and they can sell those too. So you’ve got to make sure that your pool of investors is not diluted or the stock is not diluted in ways that some companies tend to do to the disadvantage of their shareholders.
depending on how much they own, how much, what percentage of the company they own, they have a general right, to see the, uh, financial disclosures the company gets, if they’re, uh, less than 5% shareholder. And if they’re more than 5% shareholder, they can go audit the company’s books and records. And sometimes they’ll be told they have to sign a non-disclosure agreement to do so, but they can literally give notice and appear in two weeks at the company offices and start making copies or investigating, uh, what’s going on with the company. Or if that doesn’t happen, they can literally file a motion in court and have a judge order. They’d be given access to the books and records of the company.
So are there protections for minority shareholders here in California against wrongful actions, by the majority interest or officers and directors, There’s laws in place that protect them. But unless they have some type of shareholder agreement, or some type of assurances or representations and warranties, then they just have the right to, to grievance in court.
For example, we’ve had so many shareholder fights where a company group of friends or a group of friends who know friends, maybe 30 people invest in a company and it’ll be doing well, but not great. And they, the investors, the shareholders won’t be receiving disclosures, or they will be receiving them, but they sort of don’t add up. And then they do an investigation and they come to some law firm like ours and they say, ‘well, let’s, let’s get in there seeing the books and records,’ and you get some pushback from the company. And that’s when all the hairs in your neck stand up and you come to the Watkins firm and we file a motion.
And we discover through our due diligence that the company’s doing very good and that they also formed an offshore corporation of the same name. And they’ve taken all the assets and they’re all driving Rolls-Royces. So this has happened more times than I can say, because it just does happen. Nobody fights over anything unless there’s money involved. If it’s just doing okay, they would tell the truth and say, it’s all great. But if that big money offer comes in the door and they have a way of, of keeping it for themselves, it’s very tempting for human nature to turn that down. We’re here to protect our clients. Shareholders have rights.” – Dan Watkins, Founding Partner
Proven and Effective California Shareholders’ Agreement
The Watkins Firm provides strong and sound advice and counsel on any issue associated with San Diego and California shareholders’ rights based upon more than 40 years of experience. Developing a strong and effective California shareholders’ agreement at the formation of any corporation and keeping this crucial corporate document updated on a regular if not annual basis is one of the most important elements of corporate governance and compliance. It also protects your rights and investment and prevents shareholder disputes down the road.
If you are considering an investment to acquire a significant interest in a corporation or are seeking a strong, proven and experienced San Diego shareholders’ rights attorney we invite you to review our Podcast Episode 14 – Shareholders’ Rights and Disputes, the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.
Meet Daniel Watkins:
Daniel W. Watkins is a true people person who sincerely listens. He cares deeply about what others are going through. Dan enjoys digging into the facts and finding creative solutions to problems. He contributes his insights candidly and constructively.
Dan’s interest in people make him deeply invested in every relationship and his exuberant personality makes him a true litigator. Dan fights for his clients with a fierce and calculated commitment.
Dan has practiced in the areas of business, medical practices and healthcare business, high tech/science, real estate and employment defense law since 1987. He is a trusted litigation strategist and true trial attorney with over 50 jury and bench trials to his credit. Dan has successfully represented both large companies and individuals and achieved substantial victories in well-publicized trials throughout California and the U.S.
He is experienced in business and corporate formation and administration, as well as all forms of alternative dispute resolution, including binding arbitration and mediation.
THE ROAD TO BECOMING A BUSINESS LAWYER AND LITIGATOR
Dan has almost 40 years of experience working with, for and against some of the largest insurance companies in the country. He has successfully tried and litigated cases in the areas of Healthcare Compliance, Commercial Litigation, Unfair Business Practices, Fraud, Breach of Contract, Battery, Premises Liability, Product Defect, Medical Malpractice, Discrimination, Sexual Harassment, Construction Defect, as well as Unfair Competition, Defamation, and Trade Secrets.
In December 2003, Dan commenced litigation against Health South Surgery Centers-West, Inc and its’ subsidiaries, exposing the company’s extensive mismanagement and misconduct of its’ surgery centers. Dan has also been asked by some of California’s largest municipalities and corporations to conduct legally required investigations into matters involving alleged employment discrimination and harassment.
