A Shareholder Agreement is important if you own shares of a corporation (also called “stock”) along with one or more other owners of shares (called “shareholders”). If the shares of stock you own are shares of a publicly-traded company, you can sell those shares as you please. If the shares of stock you own are shares of a closely-held, private company with a Shareholder Agreement, your ability to sell shares is likely limited or restricted. A Shareholder Agreement may also be referred to as a Stock Redemption Agreement or Buy-Sell Agreement.
Among the examples of benefits mentioned in this post, a Shareholder Agreement is important because it keeps your privately-held corporation “closed”, meaning the corporation or another shareholder cannot sell stock without first meeting all of the conditions of the Shareholder Agreement. One condition often included in a Shareholder Agreement is a right of first refusal. A right of first refusal condition requires a shareholder interested in selling shares of stock to first offer their shares for sale on the same price and terms as offered by a potential buyer or at a more favorable, predetermined price and terms specified in the Shareholder Agreement.
A Shareholder Agreement is also important because it can include provisions for important contingencies, such as promoting the business’ continuity if an active shareholder dies or becomes mentally or physically incapacitated. The Shareholder Agreement can outline the process for an orderly transfer of ownership of the corporation and its business assets if a specified issue or contingency occurs. This process is known as a Shareholder Exit Strategy and typically follows a specific “triggering event” such as a shareholder’s death, disability, divorce, or retirement.
Below are additional reasons why having a Shareholder Agreement is important:
- Maintain control over who is, and is not, an owner or shareholder of the company;
- Spell out the criteria to be an owner of the company;
- Provide a process to break a deadlock among shareholders;
- Avoid conflict and disruption when an owner wants to leave the company;
- Provide a Shareholder Exit Strategy;
- Provide a “market” for shareholders to sell their shares by requiring the selling shareholder’s shares to be sold to the corporation or to the remaining shareholders;
- Provide the specific terms for sale of the shares, including the price or how the price per share is determined;
- Assist with estate transfer of business shares by providing for the funding of life or disability insurance regarding each shareholder, the proceeds of which would be applied to buyout the shares of a shareholder who died or unexpectedly became disabled; and
- Include specific, custom-drafted provisions based on the needs of the corporation’s business and its shareholders.
Should My Company Have a Shareholder Agreement?
Without a Shareholder Agreement, things can quickly get sideways and quite tense when a shareholder wants or needs to suddenly leave the business. For example, if a shareholder in a corporation without a Shareholder Agreement dies and leaves her shares to a family member, that family member becomes a shareholder in the corporation and will have an important voice in the election of its officers and directors, regardless of that person’s lack of experience with the corporation’s business and operation. A Shareholder Agreement can limit the ownership of the corporation to persons who meet specified criteria. Because most Shareholder Agreements contain a provision to value the shares at the time of a triggering event, such as a shareholder’s death, Shareholder Agreements are usually very detailed regarding the purchase price of the shares and how that price is paid.
Talk with an experienced business attorney to know what provisions should be included in your corporation’s Shareholder Agreement. Every Shareholder Agreement, at a minimum, should contain clear language about the provisions described in this post.
The best time to implement a Shareholder Agreement is at the formation of the corporation. Shareholder Agreements should be regularly reviewed to confirm the agreement reflects any changes to the business structure and value of the corporation’s shares.
To get business legal help with your corporation’s Shareholder Agreement, please contact our Oldsmar, Florida office at 813-852-6500 to schedule a courtesy discussion.
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