The Purpose of a Shareholder Agreement | The Important Provisionsof a Shareholder Agreement
When you’re setting up a new business enterprise, it can be easy, in the excitement of the moment, to assume that you’ll always get along with everyone else, and that there will never be disagreements. The unfortunate reality is that whenever two or more people come together, there are usually at least two ideas about how things should be done. That’s why it’s important, if you’re setting up a shareholder-based business, to negotiate and execute a shareholder agreement.
What a Shareholder Agreement Should Do
A good shareholder agreement does three things:
- identifies how the company will be operated—who will perform the different functions, how often shareholders will meet, how decisions will be made, etc.;
- provides protection for each shareholder’s investment in the company; and
- sets forth the terms of the relationships between shareholders.
Ideally, the shareholder agreement will be negotiated and drafted prior to the incorporation of the company, so that it goes into effect as soon as the company is legally formed. That assures maximum protection for all shareholders.
Essential Content of the Shareholder Agreement
At a minimum, the shareholder agreement should include provisions addressing:
- the issuance, purchase, transfer or sale of shares, including measures to prevent the acquisition of shares by undesired third parties and a provision stating what happens to a shareholder’s interest upon their death;
- the day-to-day operation of the company, including specific provisions about how business decisions are made, how financing is obtained, how board members are selected, removed and compensated, and how information is communicated to shareholders;
- how and when dividends are paid;
- any restrictions on shareholders regarding associations or business relationships with competing entities;
- how shareholder disputes are resolved; and
- the extent to which minority shareholders are protected (requiring certain decisions to be approved by all shareholders, for example).
Contact MCIS Law
At MCIS Law, PLLC, in Stafford, we provide comprehensive counsel to startup and existing businesses in southeast Texas, including advice on shareholder agreements. For a confidential consultation with an experienced and knowledgeable lawyer, email us or call our office at (346) 297-0121. We accept all major credit cards.