Frequently we encounter corporations that do not have a Shareholder Agreement in place, which can create major problems for owners of a corporation. The problems occur most often when a shareholder:
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Dies
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Becomes disabled
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Quits and then tries to compete
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No longer “carries his weight” as an employee
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Has a “falling out” with the other shareholders and an “economic divorce” is called for
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Retires
Frequently, the shareholders have “put off” putting a shareholder agreement in place, planning to “get to it someday.” But when one of those all-too-common events occur, it’s then too late to solve the problem without contentiousness, sometimes including law suits.
On the other side of the coin, having a clear Shareholder Agreement in place allows the shareholders to plan for the future, and to avoid unexpected problems when one of those events occur.
A Shareholder Agreement can address any number of issues, but usually addresses issues like:
Restrictions on Transfers
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To avoid having the current shareholders ending up with unknown, unanticipated and/or undesired “partners” (including spouses or children of shareholders)
Buy-Sell provisions
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Specifying “redemptions” by the Company, or “cross-purchases” between shareholders, on specified “Triggering Events” (death, disability, termination without cause, termination for cause, bankruptcy of a shareholder, retirement, etc.)
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Setting the price that will apply to a buy-sell, based on a formula or other method (with or without discounts for minority status or lack of marketability, or control premiums)
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Providing for funding of a purchase with insurance and/or promissory notes
Employment
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Provisions regarding shareholders’ roles, and accountability, as employees
Confidentiality, Non-Competition and Non-solicitation, and Intellectual Property Provisions
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Addressing these subjects will often secure legal rights that the parties thought were implicit, but in fact may not be
S Corporation provisions
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Prohibiting transfers of stock that would jeopardize a corporation’s S election
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Providing for mandatory distributions of cash to enable shareholders to pay taxes due on Company income attributable to them (subject to normal insolvency limitations on distributions)
Arbitration
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Confidential arbitration of disputes in an agreed location.
Shareholder Agreements can present important corporate law, income tax, employment and intellectual property law issues, and must be thought of on an integrated basis.
It is the rare situation in which a Shareholder Agreement is not appropriate for a privately-held corporation. And given the importance of the businesses at stake, and the fact that the shareholders’ interests in the corporation frequently represent one of their most important assets, having a Shareholder Agreement in place is a lot more than good “housekeeping.” It is essential.
For more information on Shareholder Agreements, contact Jim Zimpritch or a member of our Business Practice Group.
