A Shareholder Agreement, sometimes referred to as a Buy-Sell Agreement, can be a helpful tool in the structuring and governance of a closely held corporation. Unlike publicly traded and large corporations, closely held corporations have only a few shareholders, which in some cases are friends or members of the same family. Although in an ideal world shareholders of a closely held business get along, especially when friends and family, it is important for the Shareholders to execute a Shareholder Agreement. The Shareholder Agreement can protect the individual interests of the shareholders, which may not always be aligned, and prevent an unnecessary dissolution of the Corporation over a shareholder dispute.
A Shareholder Agreement typically provides for, among other things, restrictions on the transfer of stock in the corporation. This is especially important in a closely-held business because the owners of the business want to make sure that any new owner buying into the business is approved by the existing owners. The Shareholder Agreement can also provide for a right of first refusal, which will give the existing owners the option to purchase an owner’s stock in the event of a sale. In addition, if the corporation becomes marketable to another entity or person, but the purchaser wants all or none of the stock of the corporation, what is known as a “drag-along” provision will require minority owners to sell their stock along with the majority owners. Similarly, a “tag-along” provision will protect the minority owners from the sale of the majority of the stock, requiring the minority stock to be sold along with the majority as a package.
In addition to restricting transfers of stock, the Shareholder Agreement can provide for certain shareholders to be designated as directors to manage the corporation and methods for resolution of shareholder disputes, such as arbitration or buyout provisions. Without these provisions, a dispute between the owners of the corporation could require expensive litigation and even result in the dissolution of the corporation.
Perhaps most importantly, the Shareholder Agreement can implement non-competition, non-solicitation and confidentiality provisions to prevent a disloyal owner from competing with the corporation, pilfering intellectual property and poaching customers, employees or suppliers. These provisions, when carefully drafted, can protect the profitability of the corporation, even after the disloyal shareholder sells his interests in the corporation.
The above provisions are just a few examples of the issues that can be addressed in a Shareholder Agreement. It is important for all closely-held corporations to have a Shareholder Agreement drafted to address the particular needs of the shareholders and the corporation. If your corporation needs a Shareholder Agreement, speak with an attorney to discuss drafting a Shareholder Agreement that can protect not only the interests of the shareholders, but also the future success of the corporation.