Shareholders' Agreements: Keeping The Peace
Forming a company can be an exciting venture, full of optimism, energy and expectation. It may be difficult, especially at that moment, to fathom that anything can go wrong in the future, especially if forming it with people you trust and respect. Common mistake. Ask any lawyer about inter-company conflict; it’s common enough to be considered an inevitable fact of life.
With high hopes for success, it remains a smart idea to consider the value of a shareholders’ agreement at a company’s outset to act as a safeguard in the event of owner disputes, death, disability, bankruptcy or other events.
Shareholder agreements are supplemental to a company’s formation documents like the Certificate of Incorporation and Bylaws, which set forth basic corporate mechanics, procedures and rights among the shareholders. By contrast, shareholder agreements are private contracts and therefore easier to administer, modify or terminate. They allow shareholders to set forth their rights and obligations to each other and the company in greater depth and detail.
A comprehensive shareholders’ agreement will, for example, typically set forth terms and conditions addressing, among other topics, the nature of share ownership. “Buy-Sell” provisions are typical mechanisms regulating the purchase and sale of stock in particular situations including when a shareholder dies, becomes disabled, divorces, goes bankrupt or undergoes a change in control (if the shareholder is an entity). Shareholders most often utilize a simple right of first refusal to purchase the shares in these circumstances, or alternatively set forth an unequivocal requirement to purchase. Also common are tag-along rights, which protect minority shareholders by allowing them to “tag along” and participate in a sale of shares by controlling shareholders to an outside buyer, or alternatively, drag-along rights, which allow controlling shareholders in the midst of a sale to force (or “drag”) minority holders to sell their stock as well. Also commonly featured in shareholders’ agreements are pre-emptive rights, which protect against dilution by allowing shareholders to purchase their pro rata share of future stock issuances by the company.
Shareholders’ agreements often address a host of other pertinent matters surrounding control and management of a company, including voting requirements and voting agreements, and they may make provision for resolving future possible shareholder disputes. They may also include confidentiality provisions and other provisions setting forth certain shareholder rights to company information.
Clarity and flexibility are two hallmarks of a well-drafted shareholders’ agreement, which will not only keep litigation at bay but preserve a sense of fairness and order through the life of a company.
For assistance with these matters, please contact a member of our Business practice.
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