Anticipate Future Possibilities with a Shareholders Agreement

A shareholders agreement drafted for a privately held company details the rights and obligations of the shareholders. It not only provides guiding principles for running the business today, it lays out the ground rules of what to do if one of the shareholders dies, becomes disabled — or one party wants to dissolve the business.

In other words, it can resolve issues in the future that you may not even anticipate now.

Caution: There are online shareholders agreement templates that can be filled in. But there is no one-size-fits-all shareholders agreement that is applicable to all businesses. Your company is unique and the terms of your shareholders agreement must reflect that. In addition, it must comply with the laws of the state where it is being drafted and be in compliance with SEC regulations.

A shareholders agreement can be a complex document. Here are just some of the questions your attorney may ask when drafting one.

What is the basic information about the business and the shareholders?
    • The name, address and state of incorporation of the business.
    • The names and addresses of all shareholders who are parties to the agreement.
    • The number of shares each shareholder will own.
How will transfers of shares be handled?
    • Can shareholders transfer shares to family members?
    • Must the company or other shareholders be given the right of first refusal to purchase them?
    • Must shareholders approve any transfer?
What about the sale of shares?
    • Must the company or other shareholders be given the right of first refusal to purchase them?
    • Can shareholders sell some shares or must all shares be sold?
    • Can shares be sold to a third party?
How is each share valued?
    • What is the present value of each share?
    • Is the price based on book value, fair market value based on the company’s assets and liabilities or another method?
What will happen if a shareholder dies?
    • Will a shareholder’s shares be sold only after the business or other shareholders have the first election to purchase them?
    • Will there be life insurance to pay for the shares?
What happens if a shareholder becomes disabled?
    • Will a disabled shareholder’s shares be sold only after the business or other shareholders having the first election?
    • Will there be disability insurance to pay for the shares?
    • How will you define “disability?”
What about new shares?
    • Is the issuance of new shares prohibited?
    • If not, must shareholders be offered new shares in proportion to their interests so they won’t be diluted?
How will disputes be handled?
  • Must they be resolved by arbitration?
What about spouses?
    • What restrictions will be placed on the ability of shareholders to transfer shares to a spouse?
    • Do spouses have the right to vote?
    • What about in the case of divorce?
What limitations will be placed on shareholders’ ability to compete — especially if they sell shares or leave the business?
    • How will the scope of a non-compete clause be defined? For example, how long will it last and what geographic area will be covered?
    • Can shareholders be involved in other businesses that may potentially compete with the company?
    • Is there a non-solicitation clause that prohibits shareholders or former shareholders from hiring employees (or independent contractors) to work for another competing business?
Will there be a board of directors?
    • Who can serve?
    • What are their duties and roles?
How will contributions be handled?
    • What is the amount of initial contribution?
    • How will future capital contributions be made?
    • How will capital contributions be paid back?
When will the shareholder agreement terminate?
    • Will it end when all shareholders agree to it?
    • Will it stay in effect until a specific date?
    • What if some of the shareholders want to sell the business but the others don’t?

This article only covers some of the issues that could be covered in a shareholders agreement. The exact provisions will depend on the shareholders and they type of business. By having an agreement, you can help avoid contentious, expensive disputes in the future and help protect the rights of all shareholders.

Note: The attorney drafting the agreement is representing the company. Each of the shareholders should be advised to consult with an attorney to protect their individual interests.

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