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Negotiating Shareholder Agreements

Published August 3, 2010

Shareholder agreements are documents that provide businesses with a roadmap of how to act in certain situations.  A shareholder agreement is negotiated and executed so that common procedures will be established before any business problems develop.  Generally, the most important issues contained in shareholder agreements are those that address stock ownership.  A shareholder agreement can achieve two important purposes with regard to stock ownership: it can control when a stock is sold and to whom.

A shareholder agreement can also limit a stockholder’s actions after his are sold.  Some shareholder agreements include non-compete clauses that prevent a stockholder who sells his shares from directly competing with the business for a defined period of time.  In order to be enforceable, this provision must be carefully written so as to allow the selling shareholder the opportunity to make a living and not unduly restrict economic competition.  If these previsions are discussed thoroughly when the agreement is being drafted, it is less likely that shareholders will run into conflicts in the future.

A shareholder agreement can also contain other important provisions regarding how a business is run.  A shareholder agreement can:

  • explain the process for the addition or withdrawal of a shareholder.
  • require a majority vote among stockholders on certain issues.
  • describe how future capital contributions will be made to the business and how these contributions may affect ownership rights.
  • outline how deadlocks will be resolved.
  • establish procedures for conflict resolution if a dispute arises among stockholders.

These are only a few of the elements a shareholder agreement can contain. Shareholder agreements should be carefully and thoroughly discussed and prepared.  These agreements will prove to be invaluable to your company, and it is important that all shareholders have the opportunity to discuss the terms they’d like included.

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