Shareholder’s agreement

Have a shareholder issue or a question? Call our shareholders’ agreement and 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. On the other hand, with closely held corporations or LLC’s, this board is absent. Therefore, many of times infighting occurs with regard to the operation of a business. A Shareholder Agreements can 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 draft 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.

Buy-Sell Agreements

A shareholders’ agreements can include to have “buy/sell” arrangements. These arrangements restrict the transfer of shareholder interests upon certain activating events. Therefore, 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 suit your business and your needs? It 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. So, a business lawyer can help you choose the right agreement as per your business.

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 (One may review it periodically)
  • Formula
  • Expert Appraisals

Here are the common questions that most of the shareholders ask:

When should I create a Shareholder Agreement?

One should create a shareholder agreement even if there are small number of shareholders. The contract should be active before the company begins business. Basically, it ensures that all of the shareholders are in agreement over its contents.

Why should I create a Shareholder Agreement?

A Shareholder Agreement addresses important issues, such as transfer of shares and the rights of shareholders and officers. Moreover, it helps to keep the corporation running smoothly.

In addition, this agreement can protect shareholders by confirming that everyone is in agreement over the corporation’s rules. Further, it is used to refer to in case of future disputes.

Do you have any queries related to shareholder’s agreement? Talk to out business lawyer in New Jersey today and get answers of all your queries.