Why Having a Shareholder Agreement is Good for Business
If there's one constant, it's change. And you've heard that before. If you're a partner or shareholder in a business, you will likely find that change is inevitable. Perhaps the time comes when you can no longer do business together with your other partners, or that your goals and ambitions have changed.
Having a shareholder agreement is beneficial to businesses because it allows for the anticipation of these changes in your life and career, and sets the terms for addressing these changes.
Everything starts with the buyout. If a time comes when you can no longer do business with your partners, or that one's goals and ambitions have changed, a buyout is more likely than not. What's important to know is that a recent change in Texas law makes forcing a buyout more tricky. Under the 2014 case of Ritchie v. Rupe, Texas courts can no longer order a buyout except under very limited circumstances.
This case makes having a shareholder agreement that sets forth the rights and responsibilities of the parties extremely important. In general, a shareholder agreement can cover several issues:
- Triggering events
- A process that establishes how to buy one another out
- A mechanism for establishing the purchase price
- A methodology for determining payment
- A way to prevent a partner or shareholder from unfairly competing after a buyout
We cover a few of the most important points below.
Maintain the Integrity of Your Business
This is one of the most important aspects of having a good shareholder agreement. If things go south, so to speak - which happens more often than you'd like to believe - maintaining the integrity of your business in the face of serious problems will be of paramount importance.
So how does a shareholder agreement help maintain the integrity of your business?
- Triggering events: Let's look at the example of a medical practice. Two decades of exemplary service could trigger the payout of a generous compensation package (as specified by the shareholder agreement). So, too, can medical malpractice or license suspension, which could instead trigger a buyout at reduced market rates.
- An established process: The shareholder agreement can put in place both a process and methodology for establishing how partners or shareholders might buy one another out. This can include the purchase price, how to determine the purchase price, and how the purchase price will be paid. The key here is that the process has been established before a problem arises, not after, which by then may be too late.
- Preventing unfair competition: If one partner or shareholder is bought out under difficult circumstances, you take a risk not having a provision in the shareholder agreement for non-competition and/or non-solicitation. The partner or shareholder could turn around and begin competing directly against you.
Contact Hendershot, Cowart & Hisey, P.C.: Call (713) 909-7323
A shareholder agreement is a wonderful thing for many types of businesses, especially professional businesses including medical practices, law practices, engineering firms and other services. At Hendershot, Cowart & Hisey, P.C., we can come up with creative safeguards that will help your business maintain its integrity when the inevitable problems arise. Learn more about shareholder agreements by visiting our webpage.