What Should You Include In Your Shareholders Agreements?
If you are looking for people to buy shares in your business, and thus, invest in it, those investors are going to want to know what their rights are. Specifically, they are not going to give you money or take shares in your company without a shareholders agreement. But what is in a shareholders agreement—and when do you need one?
You may not be very familiar with shareholders agreements because when you buy shares in large, publicly traded companies, you generally don’t have many rights, other than to collect dividends or sell the shares for money. You aren’t an active member of Amazon just because you buy their shares.
But smaller and midsize companies are very different. Shareholders may be a larger part of the decision-making process in your business and you may even know your shareholders personally.
Purchase Price and Payment in Kind
The purchase price is of course included in the shareholders agreement but even that isn’t as straightforward as you may think because often, a shareholder will pay for shares in return for services, or the providing of material goods. If shares are contingent on future work or services for the company, that needs to be spelled out as well—including the consequences if that future work or future services are never provided.
Remember that shareholders have some, limited rights to manage the company, but so too does your board of directions, as well as your officers. Your shareholders agreement should not provide rights to shareholders that could conflict with the rights of board members.
Transfers of Shares
Shareholders can lose shares, voluntarily (such as by selling the shares) or involuntarily (such as in a divorce, or a creditor taking the shares, or bankruptcy or passing the shares along after death). The problem with any of these scenarios, is that you may have wanted to work with the original shareholder, but you may not know, or want to work with the new one.
Your shareholders agreement may have provisions where your company has the option of buying back shares that are passed along or sold or transferred, including a pre-set price for the buy back. This way, your company is not forced to have a shareholder it doesn’t want.
Depending on the level of involvement by your shareholders, the agreement can have other provisions as well, such as noncompete agreements, or detailing trade secret restrictions. It can also detail what happens if a shareholder who is also an officer or employee of the company, is fired, quits, or no longer has the position.
The agreement may also allow the company to opt to retain profits to roll over, and invest in the company, instead of passing along all profits as shareholder payments (dividends).
Questions about your business’ agreements or contracts? Call our Fort Lauderdale business law lawyers at Sweeney Law P.A. at 954-440-3993 today.