Your Shareholders Agreement Should Prevent Disputes

Your Shareholders Agreement Should Prevent Disputes - Business

Did you know your shareholders agreement should prevent disputes and ensure everyone is working toward the same goals and objectives?  Why is it so important to work with the proven, experienced San Diego business attorneys at the Watkins Firm to tailor your shareholders agreement and corporate documents?

The shareholders agreement and corporate documents are one of the most important aspects of starting and operating a corporation in California.  This is an area where we spend a lot of time with our new business clients, and an issue downloaded forms can’t and won’t address in full.  The shareholder agreement establishes the relationship between those who have a stake in the company, and, most importantly, what will happen if there is a major life event in one or more of the shareholder’s lives.  It should be continually updated throughout the life of your corporation to ensure maximum protections and flexibility.

The shareholders agreement should prevent disputes before they ever happen by anticipating all that might occur while laying out specific action plans for how things will be practically and financially managed.  What happens if one of the shareholders is going through a divorce?  Will the shareholder’s spouse suddenly become one of your business partners and will they have voting rights due to their “community share” of the business interest of the original shareholder?  What happens if one of the parties dies or becomes unexpectedly incapacitated due to an accident or illness?  What if one of the shareholders wants to be bought out, or has financial troubles personally and files bankruptcy?

The shareholder agreement specifies all of these answers up front, when everyone is working together and cooperating in the best interests of the company.  It determines the processes involved and how the interest will be valued.  It also establishes how payments will be made to ensure that the business is not forced to wipe out its financial reserves to purchase one of the shareholder’s interests.  These agreements require extensive legal skill, experience and careful thought and planning.  This single document can prevent shareholder disputes and ensure that the company survives and prospers regardless of what is happening in the private lives of its officers and shareholders.

Dan Watkins Founding Partner of the Watkins FirmPro-Tip: “We’re talking about privately held companies. When you invest in a company down the street, that’s not on the New York stock exchange, you still become a shareholder and shareholders have rights. First thing you should think about when you become a shareholder is like shareholders should be treated in a like or similar fashion. When you join a corporation by investing and you find out that someone with a similar shares as you is getting paid more dividends than you are, you are not going to like that. And you shouldn’t because that’s why we have different classes of shares. 

That’s why we have those laws and rules. Also. You have to look and find out if there’s a shareholder’s agreement, which could define who gets what and who gets paid. What if you want to pay people differently than what their ownership is? Then, you should probably consider a limited liability company. But if you’re selling shares, you’re still subject to shareholder laws in the state of California and other places.

And those shareholders have a right to vote. They have a right to see certain disclosures. If you have over 5%, you get to see more financial documents of the company and you have a right to dividends. If other people are getting dividends, then you have a right to show up at the annual shareholders meeting. And if an investment represents more than 5% as a shareholder, they can go audit the company’s books and records.” – Dan Watkins, Founding Partner

The attorneys at the Watkins Firm have 40+ years of experience serving the business, science and tech, real estate and medical / healthcare communities here in San Diego and across California.  Our experienced corporate attorneys can guide you through each decision point in these complex agreements.  A tailored, carefully crafted shareholders agreement should prevent disputes while saving substantial time and money now and down the road.  This doesn’t have to be an expensive document up front, and the expense it saves down the road can literally be the value of your company. We invite you to review our podcast Episode 14 – Shareholders’ Rights as well as the strong recommendations of our clients and contact the Watkins Firm or call 858-535-1511 for a complimentary consultation today.