A shareholders’ agreement will outline aspects of the shareholders’ relationship to each other regarding matters that are not included in a corporation’s bylaws. An important part of a shareholders’ agreement is the buy-sell provision that states what happens when one of the shareholders can no longer participate in the corporation’s business due to death, disability, bankruptcy or other situation. The shareholders’ agreement also is used to ensure that shareholders are actively involved in running the company. The agreement should include provisions that require a shareholder to be on the board of directors and appointed as an officer of the corporation. If a shareholder does not want further involvement in operating the corporation, the shareholders’ agreement can require that shareholder to also sell his shares back to the corporation or remaining shareholders.
What is a shareholder’s agreement and why have one?
A shareholder’s agreement is a contract between the shareholders where they agree to one or more of the following:
- Deal with the sale of the stock of the corporation by a shareholder or the corporation.
- Arrange for the purchase of stock when one shareholder dies or becomes disabled.
- Who will be the directors or officers of the corporation.
- When the corporation will distribute dividends.
- Compensation for shareholder-employees.
- Issues relating to the management of the corporation, such as borrowing, budgets, office and facility location, business name, business type, etc.
- Shareholder’s agreements are key for small closely held businesses where the shareholders are usually active in the day-to-day affairs of the business. Since those businesses are dependent on the shareholders to work for the business, it is important to deal with the points listed above, especially thedeathof a shareholder and shareholder disputes.
Most small business owners don’t want to be in business with their “partner’s” spouse. So a shareholders agreement should provide a way for the surviving shareholders to buy out the deceased shareholder at a fair value and should fund the payment, usually with life insurance.
Also, shareholders often find themselves in a dispute with one another over the operation of the business or the other’s efforts in the business. To avoid killing the business, the shareholder’s agreement should provide for a realistic way for a shareholder to leave without harming the business or the shareholder’s investment.