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The Importance of Shareholder Agreements for Corporations

Adelman Law, P.C. July 25, 2023

When multiple people get together to form a business, they have a choice of how to legally structure their enterprise. They can choose a partnership, a limited liability company (LLC), or a corporation.

Partnerships tend to expose parties to financial and legal liability, while LLCs provide more protections for the individual founders, who are thereafter called members. A corporation, like an LLC, is a more-established separate legal entity and shields those who create it from individual liability. These individuals are known as shareholders.

The original shareholders may decide ultimately to take on more shareholders, or even to take the corporation public and allow open-market bidding on the shares. A corporation, by law, must file articles of incorporation to become legitimate. It must also create bylaws by which the board of directors and officers of the corporation must abide. Additionally, an optional but wholly important piece of the corporation’s inauguration—especially if the original investor group is to remain limited—is a shareholders’ agreement, also known as a stockholders’ agreement.

You may think that joining an entity with family, close friends, and associates will ensure a smooth launch and continued operation of the enterprise, but disputes and issues can always surface unexpectedly. A shareholders’ agreement can anticipate disruptions and challenges and put in place policies and procedures to deal with them.

If you are in the process of forming a corporation or thinking about opening a business with other partners, contact us at Adelman Law, P.C., to help create your founding documents, including a shareholders’ agreement, for the continued future and strength of your enterprise. We are experienced in tailoring business agreements to the individual needs, backgrounds, and goals of our clients.  

What Is a Shareholders’ Agreement?

In its most basic sense, a shareholders’ agreement outlines the rights and responsibilities of each shareholder. One issue to be faced straight on, when the corporation is being formed, is whether you want to keep the corporation tightly held by a small circle of investors, or whether you want to eventually offer shares to others. The agreement should also address how the business should be operated. In addition, the original document should name the founding shareholders.

What To Include in a Shareholders’ Agreement

Some of the issues to be addressed in a shareholders’ agreement include, as indicated above, whether to take on additional shareholders and how to do so. As part of that, qualifications for who can be a shareholder should be detailed.  

Also, consider this: what if one shareholder wants out, loses the capacity to own shares through incapacitation, passes away, or is ousted by other shareholders? These issues need to be thoroughly explained as to the process involved. 

Other issues to be covered include: 

  • Optional versus mandatory rules for buying-back of shares by the company in the event that a shareholder gives theirs up 

  • A right of first refusal clause, detailing how the company has the right to purchase a shareholder's securities prior to their selling to an outside party 

  • A method to establish a fair price for shares, either re-calculated annually or via a formula 

Sections Generally Included in a Shareholders’ Agreement

Sections can vary and be titled differently, but these are common elements of a shareholders’ agreement: 

  • PREAMBLE: This identifies the parties agreeing to the document, naming the company and shareholders. 

  • LIST OF RECITALS: The stated rationale and goals for the agreement. 

  • BUYING AND SELLING PROVISIONS: This section addresses the issues listed above on how to buy back shares of a departing shareholder. It also details the rights and obligations of shareholders when it comes to buying or selling shares. 

  • FINANCING: This section specifies how shareholders will contribute capital to the company and what happens if a shareholder can no longer meet his or her obligation. 

  • TRANSFER OF SHARES: This sets up a protocol for a shareholder who wishes to transfer shares to another shareholder or offer first rights to sell their shares to other shareholders. 

  • DISPUTE RESOLUTION: An important section because you never know when a dispute may erupt, this sets forth the process for resolving disputes among shareholders. 

  • CONFIDENTIALITY: This restricts the details of the agreement to those who are part of the agreement. 

  • SHAREHOLDER MEETINGS: This section can lay out a meeting schedule for shareholders. It can also address voting procedures and other procedures pertinent to shareholders. 

  • PROTECTIONS FOR THE COMPANY: The agreement should not only protect shareholders but also the company itself. Limitations can be placed on shareholders’ interaction with customers or being involved with competitors. 

Take Your Business in Your Hands

If you’re forming a corporation, you want to make sure your articles of incorporation, bylaws, and shareholders' agreement all sync with one another and address your individual goals, needs, and anticipated structure. While you can find downloadable shareholders’ agreements where you just fill in the blanks, these will undoubtedly fall short of providing you the precision and focus your enterprise will require.

Contact our business attorneys at Adelman Law, P.C. for all your business needs, including the creation of a shareholders’ agreement to anticipate future issues and address their resolution in advance.