What Should be in a Typical Shareholders Agreement?
If you have or are starting a business, and your business has shareholders, those shareholders will undoubtedly want (and deserve) a shareholders agreement. Of course, the hope Is that you would go see a qualified business or corporate law attorney to help you with the task of drawing up a shareholders agreement, but it may be helpful to know exactly what kinds of things are normally included in a shareholders agreement.
Why So Important?
Shareholder’s agreements are more important to small or midsize businesses, where shareholders will vote, and perhaps, work in, or control, some aspect of the business. Compare that to shareholders who buy public stocks, where the purchase of the shares (and thus, the shareholders agreement) generally limit the shareholders to the right to certain information, and, of course, the right to share in the company’s profits via dividends.
Paying for Shares
Unlike larger companies, in smaller companies, shareholders can pay for their shares with money, but also may have the option of paying for shares in the form of in kind services, or gifts to the company (for example, free office space, or free use of business equipment in return for shares).
Shareholders agreements will often have different classes of shares, which may be priced differently. Classes may give certain shareholders the right to vote, while others cannot vote, but will have the right to collect dividends.
Duties and Obligations
Where shareholders do have duties to the company (like giving in kind gifts, or performing work for the company), you may want to spell out what happens if the shareholder doesn’t live up to his or her end of the bargain. Additionally, where shareholders have duties, the role of shareholders as compared to the board of directors, should be carefully detailed.
Shareholders can also be obligated to do things like protect trade secrets, or be restricted from holding shares in competing companies, as a condition of ownership.
Note that shareholders can be board members, but don’t always have to be, just as board members don’t have to be shareholders. The rights of both are independent. Someone can cease being a board member, but still maintain and get the benefits of their shares in the company.
The shareholders agreement will cover procedure, such as whether meetings can be held virtually, or how many shareholders need to be present for a vote to happen.
Removal of shareholders also should be in your shareholder agreement. That includes what happens when a shareholder loses his or her shares involuntarily, such as in bankruptcy, or through a divorce—or even death. When this happens, your company could have shareholders you don’t want, need, or shareholders who don’t actually want their shares or have any interest in the business.
Your shareholders agreement can have a buyback provision, allowing your company to purchase back shares from whomever the new owners are, in the event this happens.
Question about your business agreements, or about legal issues related to shareholders or being a shareholder? Let us help. Call the West Palm Beach business lawyers at The Law Offices of Larry E. Bray today.