A Shareholders' Agreement is a written contract among shareholders of a closely held corporation that sets forth what happens if certain events take place. Without a shareholders' agreement, the stock owned by each shareholder may be transferred into the hands of third parties which may be undesirable to the other shareholder(s). When shares of stock are subject to a shareholders' agreement, a restrictive legend is placed on each stock certificate in order to put potential transferees on notice of the contract.
A Shareholders' Agreement can address what happens if anyone or more of the following events take place. A shareholder:
- Becomes disabled;
- Gets divorced;
- Decides to retire;
- Files for bankruptcy;
- Becomes legally incompetent; and/or
- Wants to sell his or her shares.
The shareholders of all closely held corporations with two or more shareholders should protect .their interests with a shareholders' agreement. Without a shareholders' agreement, you may find yourself co-owning a business with someone who is incompatible with your goals. Common provisions included in shareholders' agreements include the following:
- Restrictions on transferring and/or encumbering the shares without the written consent of the other shareholders which will be granted pursuant to the terms of the contract. Exceptions can be made for estate planning transfers to a living trust.
- A right of first refusal permitting the corporation the right to acquire shares being offered for sale. This is. referred to as redemption of shares.
- A right of first refusal permitting the other shareholders the right to acquire shares being offered for sale.
- A formula for placing a value on any shares being transferred where the parties are unable to agree on a value.
- The right to expel an undesirable shareholder and/or director under strictly defined conditions and acquire his or her shares.
- A provision requiring shareholders holding a small percentage of the stock to sell their shares if an offer to sell is acceptable to a certain percentage of the total shares outstanding.
- A provision that requires a super-majority for certain decisions.
- Minority protection provisions.
- A formula for determining when dividends will be paid.
- A formula for determining how additional capital will be contributed.
- A mechanism for dealing with disputes between shareholders. Sometimes this will include a buy-sell provision that permits a shareholder to make an offer to buy the shares of another shareholder. The offer can be accepted by the shareholder receiving the offer or it can be rejected. If rejected, the shareholder who has rejected the offer must then agree to buy the shares of the other shareholder at a price of at least 3% more than the offer received. The process continues until one shareholder buys the shares of the other shareholder. Such a provision mayor may not include a provision for financing the stock acquisition.
- A mechanism for buying out minority shareholders in order to preserve the company as a going concern.
Shareholders' Agreements should always be drafted by an experienced business attorney.