You and your business partners have a solid company. A great business plan; consistent profits. Despite the company’s success (or failure), over time, one partner decides that she is ready to move on (or, you and the other partners decide that she is not pulling her weight and it is time for her to move on). She considers the value of her ownership stake high (or, you and the other partners regard it as minimal). You all are at an impasse.
Additional wrinkle: the departing partner decides to move on by selling her interest to “Seymour.” You do not even know Seymour (or, and possibly worse, Seymour really annoys you).
Similar hypotheticals could flow endlessly. The point is that, depending on the situation — good or bad — you and your business partners may be deadlocked, and the stalemate may threaten your business. A Shareholders’ Agreement (or an Operating Agreement, depending on the organizational context) is a planning tool that could help avoid such deadlocks by specifically addressing these and comparable situations before they occur. Unfortunately, many startups avoid formalizing a Shareholders’ Agreement until a dispute between the shareholders already exists. At that point, good luck in trying to get the parties to come to agreement!
A Shareholders’ Agreement (also referred to as a “Stockholders’ Agreement,” depending on the state of incorporation; or, a “Buy-Sell Agreement”) is a written agreement among shareholders of a corporation that defines the relationships among the shareholders and also between the shareholders and the corporation. A Shareholders’ Agreement typically addresses matters such as management of the corporation, voting, restrictions on transfer of shares, capital contributions, taxes, resolution of disputes, protections for minority shareholders, and shareholder exit.
Shareholders’ Agreements are not required by state corporate law statutes, which, along with the company’s incorporation documents, provide default regulations that govern the rights of the shareholders. Often, however, the default regulations are not suitable for a business’s unique circumstances; further, the owners may find that amending incorporation documents each time the nature of their relationships changes is too burdensome. As an alternative, a well-designed and properly drafted Shareholders’ Agreement can be tailored to fit the needs of the business owners, and can provide certainty and flexibility in the operation of a corporation.
Shareholders’ Agreements should be reviewed periodically, since a company’s business situation may change significantly, particularly as it matures from its initial startup days.
Do you and your business partners have a good Shareholders’ Agreement in place?
