How to Mitigate the "Business Divorce": Getting the Right Shareholder Agreement in Place
As the great Depeche Mode always said, "people are people..." - everyone is predestined to make a mistake or have an emotion or strong opinion. When it comes to people going into business with others, these same human elements will always exist. That is why no one should go into business assuming their partners will always be 100% on board with their ideas. It is especially true when entering into a venture with friends or family, which is why it's so easy for some people to assume nothing can go wrong in the future. We're not saying you can't trust your partners - we're simply saying that human nature and all its complications are facts of life, even in the business world, and having the proper legal agreements in place can act as a safeguard that will give all shareholders involved more protection against potential fall-outs.
What is a Shareholder's Agreement?
Put simply, it's an agreement between shareholders of a company that sets out the rights and obligations of each partner and defines how the company will be run and how important decisions will be made. Think of it as a "prenuptial" agreement; an agreement addressing all pivotal events and contingencies before they even happen. Additionally, there should always be an element of protection for minority shareholders. As mentioned in last week's blog post, the Ritchie v. Rupe decision severely restricted the rights and remedies of minority shareholders due to the court declining to recognize the common law cause of action for shareholder oppression. Thus it is especially important for minority shareholders to have a thorough agreement in place.
What are some things to think about for a Shareholder Agreement?
Well, a Shareholder Agreement can be a lengthy document. Points to include could be:
- Defining the structure of the company and how equity is divided
- Share ownership (cap table)
- Are there vesting provisions?
- Are there any restrictions on new equity issues?
- How will ownership buy-outs be handled during both good and bad situations? (i.e. death, divorce, bankruptcy)
- How will disputes be resolved?
- Shareholder obligations and commitments
- Death or incapacity contingencies
- How is share valuation determined?
- Dissolution triggers
- Operating guidelines and restrictions
- Which insurance is required
- Compensation for upper officers
- How contracts will be managed
- Confidentiality agreements
- Non-competition provisions
These are just the tip of types of topics that should be addressed in a Shareholder Agreement.
It's pretty daunting all the information that needs to be considered when formulating a Shareholder Agreement, which is why it is very important to enlist the help of an attorney early into the formation of the company to ensure you've addressed all the tiny details that could possibly derail your partnership further down the road. At Kerr, Hendershot & Cannon, P.C., we are experienced in reviewing, drafting and implementing these types of agreements. To request a confidential consultation with an attorney, simply call (713) 909-7323 or contact us online.