When starting a business, many business owners rely on friends, family and investors to provide them with the capital they need to get up and running. In exchange, these individuals may receive shares of the company, or equity, to allow them to benefit from any future success the company enjoys.
Often these arrangements may seem informal and friendly, with no clear need to put anything detailed in writing. However, business owners and shareholders who neglect to memorialize their arrangements through a shareholders’ agreement face the possibility of conflict and confusion down the road.
A shareholders’ agreement is a written contract between shareholders that defines:
Thus, a shareholders’ agreement is a type of governing document that explains how shareholders will interact with other officers in the company, and what role they will play.
There are certain key provisions that every shareholder should look out for when reviewing a draft of a shareholders’ agreement. First, every shareholders’ agreement that you sign should include a buy-sell provision. This allows you to get rid of your shares and leave a company if you need to do so, or acquire more if you are so inclined. For example, if a shareholder dies, the buy-sell prevents the shareholder’s heirs (who could be anyone) from obtaining control of the company. Alternatively, if a shareholder divorces, the buy-sell prevents the ex-spouse from obtaining control.
Despite the best intentions of any group of individuals forming a business, there will be inevitable conflicts and disagreements. When these conflicts rise to the level where they can no longer be ignored, some shareholders may wish to get out of the company altogether. In order to do so, your shareholders’ agreement must have a provision that allows you to sell your shares.
Second, your agreement should define meetings, decision-making, and voting rights. For instance, if your company is considering a big move into a new market, or a significant shift in strategy, a shareholders’ agreement should explain how these types of major decisions will be handled by shareholders and officers.
Will there be meetings to discuss these topics? Will they be handled primarily by officers? Will you as a shareholder have the right to vote on important issues that could affect the value of your shares? These are all issues that a comprehensive shareholders’ agreement should address.
Additionally, if you are a minority shareholder, you should pay special attention to how voting rights are allocated. It is important to know whether you have the ability to veto certain types of company transactions in the event you disagree with the majority shareholders.
Shareholders should also be on the lookout for provisions in their agreement that protect the future interests of the company. For instance, you may want to have a non-compete provision in your agreement that prevents shareholders from leaving the company and taking important information to a competitor.
Likewise, shareholders’ agreements may also have confidentiality provisions that apply to shareholders and officers. This would allow sensitive business information to be discussed at meetings without risk that such information may be disclosed to others.
There are many important things to consider when reviewing a shareholders’ agreement. These considerations often depend on whether you are a majority or minority shareholder, and what other concerns you may bring to the table. At Romano & Sumner, LLC, our corporate attorneys can assist you in drafting or modifying a shareholders’ agreement that best protects your interests. If you live in Sugar Land, Houston, or the surrounding areas, contact us online or at 281-242-0995.
Romano & Sumner, PLLC