What is a Shareholder’s Agreement?

business entities2Although shareholders of a small corporation can agree amongst themselves on virtually every conceivable subject matter, shareholder agreements are generally limited to a narrower range of topics, such as the following:

  • Who can be a shareholder?
  • Who can serve on the board of directors?
  • How will shares be voted in matters presented to shareholders?
  • How do you restrict lifetime transfers of corporate stock?
  • What happens if a shareholder dies or becomes disabled?
  • What occurs if a shareholder files bankruptcy, resigns, retires, or is fired by the corporation?
  • How much are your shares worth?
  • If the corporation is required to buy your shares, when will you be paid?

 

If you’re concerned about these or any other matter pertaining to your ownership of corporate stock, a shareholder’s agreement can help address those concerns. How do you know what provisions to include in a shareholders’ agreement? The answer to this question is complicated. Several factors to consider are:

  • How important are the shareholders to the actual conduct of the corporate business?
  • What are the relative ages of the shareholders?
  • What are the personalities and relationship of the individual shareholders?
  • Are there a number of minority shareholders?
  • Do key employees own shares of stock?
  • What are the individual needs and desires of each shareholder?

 

As with any agreement, the starting point for any discussion by shareholders of shareholder agreements is deciding what the agreement is intended to do. Each shareholder must express his or her needs.

For example, younger shareholders may be more concerned with making certain that all shareholders are active in the daily operations of the corporation, while older shareholders may be more focused on providing a market to purchase their shares in the event of death, disability, or retirement. When it comes to transferring shares upon disability or death, some shareholders may have spouses or children who are capable of running the corporation, while others may lack the necessary skills or interest, and would rather be bought out if the shareholder’s spouse/parent were to die or become disabled.

Minority shareholders may see a shareholder’s agreement as a way to maintain an elected representative on the board of directors. Alternatively, a minority shareholder may seek to align himself or herself with a majority shareholder in an agreement. This latter situation might occur where key employees who own small amounts of stock join forces with the majority shareholder in an agreement.

The content of shareholder agreements are largely the result of the people and personalities of the shareholders, and the more shareholders a corporation has, the more complicated these agreements can become.  Before drafting your own agreement, consider retaining an experienced corporate attorney who can draft a document that meets every shareholders’ needs.

 

 

Seth Heyman
Seth D. Heyman is a California attorney with extensive experience in advertising and marketing law, corporate law, contracts, governmental regulations, international business, and Internet law. He has counseled numerous successful companies, both public and private, and was responsible for regulatory compliance, contract management, corporate governance, and HR best practices for multiple organizations in many diverse industries, including marketing, telecommunications, energy, and technology development. He offers insight and guidance on federal and state direct mail, TV, radio, telemarketing, and Internet marketing laws, as well as online promotions, Internet privacy, data protection regulations, and similar matters.