Important Considerations for a Shareholder Agreement

Fotolia_194134312_Subscription_Monthly_M-300x200It may seem simple to try and put together a shareholder agreement on your own. However, a carefully drafted shareholder agreement is imperative to how your business functions in the present, but more importantly how you might need to handle things in the future. You will want your shareholder agreement to be carefully drafted to match your business’ specific needs. Even though every shareholder agreement will be different, there are some common components that most shareholder agreements include.

Governance Procedures

The shareholder agreement can outline how often meetings should be held. It can also describe the process for general or special meetings, quorum needed for specific types of matters, and how notices for the meetings should be sent. The addition of theses details not only spells out the procedural process, but also notifies members of their duties and rights as a shareholder.

Stock Issuance

The shareholder agreement should clearly identify who has stock, at what value, and what rights those stocks carry. Additionally, the shareholders should agree on details about what happens to the stock when one leaves the corporation. For example, does the company have a right of first refusal for the company or remaining owners to purchase the shares? Can the shares be transferred without restriction?

Stock Valuation

The hope is that your business will be very successful and any stocks or shares will gain value. If a member wants to sell stock, the company wishes to issue future stock, or pay dividends; there should be a formal documented process for how that occurs and how the valuation is achieved. Stock valuation might be based on obtaining some company valuation, an adjusted book value, a prior agreed to formula, capitalized earnings, or a hybrid of any of these.

Dispute Resolution

Over the course of business, it is not unusual for some conflict to develop. If the dispute escalates to the point in which it cannot be resolved by mutual agreement the shareholder agreement should include a process for handling the dispute. Common provisions here may allow for a buyout of the shareholders stock, arbitration, or mediation.

Retirement, Death, Disability, or Divorce  

Due to the complexity of life, shareholder agreements should consider some of the common occurrences in life. For example, a shareholder agreement should address what to do in the event a shareholder becomes disabled or dies. Another situation that needs to be considered is if a shareholder’s marriage ends in divorce and the spouse has rights to the stock. Although difficult to discuss, leaving ambiguities for these situations can prove disruptive.

Dissolution or Winding Up

If the business decides to cease operations for whatever reason, the shareholder agreement should outline the process of winding up the business and paying its debts. Generally, the stocks will have specific rights regarding liquidation preferences, but this should be kept in mind while drafting the shareholder agreement.

Contact a San Jose Corporate Attorney Today

There is no one size fits all for shareholder agreements. The agreement should be specifically tailored to your industry and business needs. Having an attorney advise you on your shareholder agreement can be money well spent. The experienced attorneys at the Structure Law Group can assist in the drafting and advisement of your shareholder agreement. Contact us online or by calling 408-441-7500 today.

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