The Purpose of a Shareholder Agreement | The Important Provisions of 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 can disagreements. The unfortunate reality of life is that whenever two or more people come together, there are typically at least two ideas about how things should be done. That’s why it’s so important, if you’re setting up a shareholder-based business, that you negotiate and execute a shareholder agreement.
What a Shareholder Agreement Should Do
A shareholder agreement should do three things:
- Identify how the company will be operated—who will perform the different functions, how often shareholders will meet, how decisions will be made, etc.
- Provide protection for each shareholder’s investment in the company
- Set forth the terms of the relationships between all 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.
What You Want in the Shareholder Agreement
At a minimum, the shareholder agreement should include provisions addressing:
- The issuance, purchase, transfer or sale of shares—This will typically include measures to prevent the acquisition of shares by undesired third parties. It should also identify when a shareholder may sell or transfer shares, and what happens to a shareholder’s interest in the company upon death.
- The day-to-day operation of the company—The agreement should have specific provisions about how business decisions will be made, how financing will be obtained, how board members are selected, removed and compensated, and how information is communicated to shareholders.
- How (and when) dividends will be paid
- Any restrictions placed on shareholders regarding associations or business relationships with competing entities
- How shareholder disputes will be resolved
- The extent to which minority shareholders will be protected (required 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.