A Shareholders Agreement is an agreement between a corporation’s shareholders that supports the rights and obligations between them. It addresses certain aspects of their relationship to that corporation.
Things to consider before drafting a Shareholders Agreement:
You must ensure that the interests of the business, as well as the shareholders, are accounted for when drafting a Shareholders Agreement.
Company operation and management
It’s important to know how the business will be operated. A Shareholders Agreement should address what party or parties will be responsible for the overall management and operations of the company. This may include whether, for instance, the b=Board of Directors is entitled to assign such authority to a committee or a managing director. In fact, and in the State of Florida, the shareholders may even agree to relax corporate formalities and remove the Board of Directors.
The right to appoint another Director and the Board of Directors
To the extent the corporation has a Board of Directors, the Shareholders Agreement should explain how to nominate and remove directors. Each shareholder will often have the right to appoint a director, and, in other cases, only the majority shareholders will have the right to nominate a director.
The Shareholder Agreement should account for what restrictions, if any, apply to shareholders selling shares in the corporation. In general, both the interests of other shareholders and the company’s interests would be covered by these restrictions. There is a range of risks for shareholders and the corporation in these conditions, including dilution, sales to competitors and sales to unknown third parties.
Protecting the interests of the company
For closely held corporations, shareholders will often include non-compete provisions to avoid competition with the corporation. Investors, for instance, may be less interested in investing in a corporation if those shareholders involved in the day-to-day activities open competing businesses.
A Shareholders Agreement should determine what voting rights each director and/or shareholder have and the requisite votes required to pass a resolution.
How to terminate a shareholders agreement?
A Shareholders Agreement should clearly identify the exit strategy for all shareholders. The concept of termination and what events will allow for termination to take effect should be discussed and reviewed prior to signing the document.
How can a lawyer help with the Shareholders Agreement?
A successful Shareholders Agreement balances the interests of the shareholders and the corporation. A Shareholders Agreement should provide a roadmap for the shareholders of the corporation to understand their rights and obligations to the corporation and amongst themselves. A business lawyer familiar with Shareholders Agreements can be instrumental in the drafting process as form documents online may not necessarily identify all of the issues the shareholders want to be incorporated into a new document. Likewise, for investors, the engagement of a business attorney to review a Shareholders Agreement prior to investment can help in the analysis of whether or not the investment makes sense.
This article is (i) not legal advice; (ii) provided for general information and educational purposes; (iii) not for any specific individual or circumstance; and (iv) not intended to create, and does not create an attorney-client relationship. Solutions and answers to legal issues depend on the specific facts and issues of a matter, and it would be impossible to address all such facts and issues in an article. If you would like to obtain specific legal advice about your matter, you should contact a local attorney who is licensed to practice law in your state. Mr. Pomeranz is licensed to practice law in Florida and New York. The engagement of Mr. Pomeranz and his firm, Pomeranz Law PLLC, requires that no conflict of interest exists with the firm’s existing client relationships and the parties sign an Engagement Agreement. You can read more about Mr. Pomeranz and Pomeranz Law PLLC at https://www.pomeranzlaw.com/.
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