5 Common Issues to Address in Shareholder Agreements

Whether you are just starting out a new company that will have multiple shareholders, or you’re ready to take your business to the next level by legally setting up shareholders, it is important to make sure it is done right. Having this type of agreement in place can help to ensure things are properly planned out now so that disputes and other conflicts can be avoided in the future. These types of agreements also help to ensure everyone is on the same page and there is no confusion.

When having a shareholder agreement written up, it is essential to make sure some key components are included. The following elements are among the most important in any type of shareholder agreement.

Dealing with Deadlocks

If the shares of the company are owned equally by two or more people, the shareholder agreement should include instructions on what should happen if there is a deadlock between the owners. This could identify one party as the one to make final decisions, or it could include instructions on choosing an arbitrator. There are many options on how these types of disputes should be handled, and having them clearly identified ahead of time is critical.

Sales of Shares

In the event that one of the owners wants to sell some or all of the shares they have in the company, it needs to be done according to the agreement. A shareholder agreement can specify, for example, that the other owners would have priority in purchasing back the shares. It can also say that the other owners can veto where the shares are sold. Having everything about the selling of shares clearly identified in the agreement is very important.

How the Company is to Operate

One of the most important parts of the shareholder agreement is identifying who is responsible for what roles in the company. In many cases, one shareholder is simply a “silent” investor, and the other is responsible for day-to-day operations. Having this type of arrangement clearly laid out in the agreement helps to set expectations for the company going forward.

Non-Compete Agreements

Including a non-compete agreement in the shareholder agreement is quite common. This helps ensure that none of the involved parties will attempt to strike out on their own if they don’t like the way the company is being run.

Veto Options (for Minority Shareholders)

In agreements that include one or more minority shareholders, it may be necessary to specify when they will have veto power. Allowing minority shareholders to prevent certain actions, even though they own less than 50% of the company, offers them significant protections for their investments.

Having Your Shareholder Agreement Written

Just as important as what is included in the shareholder agreement is going to be how it is written. Legally speaking, there are many requirements in terms of how things are phrased to ensure the agreement is enforceable. Contact Reyes Law Group to have your agreement drafted or reviewed by an experienced attorney.

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Written by Reyes Law Group