Have a shareholder issue or a question? Call our Ocean County Business Lawyers today. Limited Liability Companies or Closely Held Corporations often have a smaller number of stake holders. Often is the case that all or most of the stakeholders are actively engaged, or want to be, in managing the business. With large corporations there is board of directors to deal with management of the company. With closely held corporations or LLC’s this board is absent, and therefore many of times infighting occurs with regard to the operation of a business. A Shareholder Agreements can be drafted to help ownership deal with a host of common and not so common issues in a company’s evolution. For example, a mandatory mediation clause placed in a shareholder agreement can be a great tool to divert litigation or disputes that would otherwise cause a business disruption.
Basic Tenet’s of a Shareholders’ Agreement
A shareholders’ agreement can be drafted to cover the following:
- Identify whom can be shareholder. What shareholder(s) must remain.
- Shareholder’s preservation i.e., if shareholder A is selling BCD, will buy A’s shares to maintain their holding position.
- Preserve rights of outstanding shares.
- Restrict sale or transfer of shares.
- Determine voting rights among the shareholders and to otherwise provide for the management of the corporation.
- Provide for triggering events whereby other shareholders may acquire shares i.e., if shareholder A dies BCD and may purchase A shares.
- Maintain liquidity and exit strategy i.e., shareholder A becomes disabled and shareholder A needs to liquidate.
- Management/governance arrangements i.e., who has what authority to determine business decisions. Is it the board or the shareholders?
- Business succession.
- Deadlock provisions.
- Dividends and other distributions.
- Provide for “tag-along” or “co-sale” rights to minority shareholders.
- Provide for a “drag-along” or “bring-along to majority shareholders.
A shareholders’ agreements can be structured to have “buy/sell” arrangements. These arrangements restrict the transfer of shareholder interests upon certain activating events. The buy/sell arrangements may be compulsory on the seller and buyer(s) if an activating event occurs, or it can be structured as an option. The corporation itself may have the right or compulsion to purchase shares, and/or such rights and compulsions may be allocated to other shareholders.
There are basically three types of “buy-sell” agreements:
- Cross Purchase Agreements
- Redemption Agreements
- Hybrid Arrangements
Which of these agreements is best suited for your business and your needs, will come to light after exploring the intended purposes of the agreement, valuation of the business and the funds necessary to facilitate that type of buy-sell agreement.
Valuation of Interests
A good tool built into a shareholders’ agreement a) set the value of a shareholders’ interests or b) to establish a method of valuation. This eliminates any uncertainty in the valuation of the shareholders’ interests should a triggering event occur or otherwise. Valuation can be built in by:
- Fixed Price that is periodically reviewed.
- Expert Appraisals.