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How to Mitigate the "Business Divorce": Getting the Right Shareholder Agreement in Place

No one should go into business assuming partners will always be 100% on board with their ideas. It is especially true when entering into a venture with friends or family – it's easy to assume nothing can go wrong when working with people you know and love, but human nature often gets in the way. Disputes happen, and having the proper legal agreements in place can act as a safeguard that will give all stakeholders more protection against potential fall-outs.

What Is a Shareholder Agreement?

Put simply, a shareholder agreement is a written 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 Consider Including in a Shareholder Agreement?

A shareholder agreement can be a lengthy document. Points to address 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
  • Liabilities?
  • Operating guidelines and restrictions
  • Which insurance is required
  • Compensation for upper officers
  • How contracts will be managed
  • Confidentiality agreements
  • Patent/Trademark ownership
  • Non-competition provisions

These are just some of the topics that can be addressed in a shareholder agreement. Your particular circumstances will further dictate what should be included. 

Overwhelmed?

It can be daunting when considering all the information that needs to be considered when formulating a shareholder agreement. This is why it is important to enlist the help of an attorney early in the formation of the company to ensure you've addressed details that could possibly derail your partnership further down the road. At Hendershot Cowart 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.

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