Any business that has two or more shareholders or equity investors should seriously consider having a shareholder agreement to protect not only the shareholders but also the business itself. Too often, the shareholders of a start-up business are reluctant to spend the time or money to prepare an agreement that addresses the major areas of business operations or potential areas of dispute that may arise in a jointly owned and managed business.
While it is desirable to have an agreement that deals with most of the ongoing management issues in a business and the areas of potential disagreements, realistically the cost of preparing such agreement with successive meetings and drafts is not within the budget of a start-up business. However something is better than nothing, and a limited practical approach is to have what I like to refer to as a “Meanwhile Agreement.” This would take the form of two or three page listing of the most important areas of agreement between the parties without getting into the detailed “boilerplate” that usually finds its way into a 30-40 page agreement. There is always time and money available when a business evolves beyond the start-up phase and becomes profitable.
There is no such thing as a standard off-the-shelf agreement that is a one size fits all document. The most effective way to ensure your shareholder agreement meets the needs of the parties is to require the parties to be involved in the process of establishing the terms of the shareholders’ agreement While a perfect Agreement is desirable, it is more realistic for the parties to feel comfortable that they can “live” with the terms of the Agreement, no matter how brief or detailed it may be.
So what are we talking about? A Shareholder Agreement is essentially a private contract entered into voluntarily by all shareholders of a business, that contains the following kinds of provisions (the listing is not exhaustive), even in the simplest of businesses:
- the names of the shareholders
- the number and class of shares held by each shareholder
- the amount of investment by each shareholder
- what happens if the business requires additional capital
- allocation of responsibilities as between the different shareholders in the operation of the business
- what happens if a dispute arises between the shareholders; do the parties wish to create a mechanism for one shareholder to buy out the other
- How decisions relating to the business will be made; unanimity, or in the case of 3 or more shareholders, does a majority of votes rule
- What happens if a shareholder dies; will the shareholders, or the business take out insurance on each shareholder’s life to provide funds for a buy-out on death;
- what happens if a shareholder becomes incapacitated and is unable to work full time
- What happens if a shareholder wants to leave the business
- Are shareholders required to work full time in the business
- Is any shareholder permitted to start another business, or do engage in a competitive activity
Without some agreement that deals with what happens if a dispute arises, any shareholder can apply to the court for an order winding up the business, not a desirable result. However, if the parties have addressed this issue in an agreement, even if it is a short one, the courts will give effect to the parties’ intentions.
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