Business Lawyers Blog
A shareholder agreement provides a basic framework for how a corporation will be run. Although all corporations should have a shareholder agreement, it is especially important for closely held corporations where there is most likely a majority shareholder. If your business is forming a corporation, our Los Angeles corporation lawyers can review any agreement you have drafted yourself, or we can create a full shareholder agreement tailored to your needs.
What to Include in a Shareholder Agreement
A shareholder agreement safeguards the interests of both majority and minority shareholders. It also offers a clear framework for the smooth and efficient management of the corporation, which can boost its value and make it more attractive to potential employees. As a result, both majority and minority shareholders benefit.
Here are some of the most important clauses to include in a shareholder agreement:
Governance & Voting
A shareholder agreement should specify voting rights and the composition of the Board of Directors. It should also identify which major decisions require Board approval and whether that approval must be by a supermajority.
This clause is critical because it prevents a majority shareholder from making significant changes to the corporation without broader support. Minority shareholders will have their voices heard on critical issues.
Transfer Restrictions
A shareholder agreement might limit a shareholder’s ability to sell their shares. This clause protects both majority and minority shareholders by preventing surprise changes in ownership.
Drag-Along and Tag-Along Rights
Transfer restrictions provide some protection, but shareholder agreements include other clauses:
Drag-along rights: This clause empowers majority shareholders to force minority shareholders to sell when the company is being sold. It prevents minority shareholders from blocking a sale.
Tag-along rights: Minority shareholders are protected with this clause. It gives minority shareholders the right to participate in a sale if the majority shareholder sells. Minority shareholders will not be stuck with new ownership.
Deadlock Resolutions Clauses
If a corporation has two majority shareholders, then there is a heightened risk of deadlock. A corporation will flounder if it cannot make decisions. Companies can include deadlock resolution clauses, which typically require mediation or arbitration, or they even give a shareholder the right to sell in event of deadlock.
For example, one exit provision will allow a majority shareholder to buyout a minority shareholder in the event of deadlock. This provision also needs to explain how the share will be valued.
Buy-Sell Provisions
A change in ownership can be fatal to a smaller, closely held company. Your shareholder agreement might include a buy-sell provision, which gives the corporation the power to buy out a shareholder who dies, retires, goes bankrupt, or becomes disabled.
Dividend Rights
Typically, corporations are not obligated to make dividend distributions. Minority shareholders might want to protect themselves by including provisions for mandatory distributions.
Call Structure Law Group for Help with Your Shareholder Agreement
A well-drafted shareholder agreement can align the interests of majority and minority shareholders and establish clear rules for governance, ownership transfers, dispute resolution, and succession planning. By addressing these issues in advance, corporations can reduce uncertainty, protect shareholder rights, and create a framework for managing future changes in ownership and control.
Structure Law Group, LLP advises Los Angeles business owners, shareholders, directors, and officers on shareholder agreements, corporate governance, and closely held business matters. Whether you are forming a new corporation or updating an existing agreement, our attorneys can help ensure that your governing documents reflect the company’s ownership structure and long-term business objectives. To discuss your corporation’s needs, contact a Los Angeles business attorney at Structure Law Group, LLP at (310) 818-7500.