My business partner and I are the shareholders of our incorporated restaurant. Everything is going well between us but we’ve been told that we should have a shareholders agreement for our corporation. What is a shareholders agreement and why do we need one?
A shareholders agreement is a contract between two or more shareholders of a corporation that create binding rights, duties and obligations relating to the corporation, and supplements the provisions arising under the constating documents and the governing corporate statute.
There is no legal requirement to have a shareholders agreement. That said, a shareholders agreement is a powerful tool for addressing matters not addressed in the statute. For example, there are limited statutory provisions that prescribe how disputes between shareholders may be resolved. A properly drafted shareholders agreement may address disputes through provisions, such as (but not limited to) a shotgun buy-sell covenant that brings an end to the relationship with certainty. A shotgun buy-sell covenant allows one shareholder to give a second shareholder an option to either buy all the shares or sell all the shares, at a price fixed by the shareholder giving the notice. The recipient shareholder must select one of the options. A buy-sell is designed to be fair by forcing the shareholder who exercises the right to be reasonable in setting the price, because she doesn’t know if she will be a buyer or a seller.
There are many other matters that may be addressed in a shareholders agreement including management and control, work and effort requirements, survivorship, succession, share transfer matters (rights of first refusal, piggyback rights and drag-along rights), confidentiality obligations and others. Rarely are two shareholders agreements the same, as the circumstances and risks each is intended to address are unique. The very process of drafting a shareholders agreement is often useful in itself, engaging shareholders to express their expectations, thus facilitating the avoidance of misunderstandings that may lead to dispute.
A lawyer with experience in commercial and corporate matters can guide you through the crafting of a shareholders agreement that is right for your business.
EDITOR’S NOTE: This publication is the 35th installment of our firm’s Legal Matters series, which answers a reader’s question every week. If you have a general legal question that you would like to have addressed please send it via email to email@example.com