Intellequity, is a business law firm located in Portland, Oregon that can draft or advise on your shareholder agreement. I am an experienced business formation and contract law attorney that can help you navigate the pitfalls of these complicated documents and help minimize the risk that a misunderstanding between shareholders will arise; a misunderstanding that could lead to needless and expensive litigation in the courts. Read below for more information on shareholder agreements and why you should have one for your corporation.
What is a shareholder agreement?
A shareholder agreement governs the rules between shareholders in a corporation, specifying rights, privileges, protections, and obligations. It is a legally binding document agreed upon by the shareholders of a corporation.
Key elements often found in a shareholder agreement include:
The Rights and Obligations of Shareholders:
Outlines each shareholder's rights and responsibilities within the corporation.
Transfer of Shares:
Details the restrictions and protocols on selling or transferring shares. There might be clauses like pre-emption rights that give existing shareholders first refusal to buy the shares.
Board Structure and Voting:
Outlines how the company's board is structured, including the appointment, replacement, and dismissal of directors. It also defines how major decisions are made and how voting power is allocated.
Specifies how and when profits are distributed to the shareholders as dividends.
Specifies mechanisms for resolving disputes among shareholders or between shareholders and managers.
Outlines options for shareholders to exit the company, such as through a sale, and includes provisions if a shareholder becomes incapable, retires, or dies.
Protection of Minority Shareholders:
Defines protections and rights for minority shareholders to prevent abuse from majority shareholders.
Why do I need a shareholder agreement?
A well-crafted shareholder agreement can instigate harmony in business operations, protect the rights of shareholders, and avoid or resolve potential disputes effectively. There are several crucial reasons why a corporation should have a shareholder agreement in place:
Regulating Share Transfers:
A shareholder agreement can define the process for transferring shares, which prevents shareholders from selling their shares to outside parties without approval.
Control Over Operational Decisions:
The agreement can be used to govern decision-making processes, showing who has influence over what decisions, and which decisions require unanimous approval or simple majority.
Protecting Minority Shareholders:
The agreement can set provisions that guard the interests of minority shareholders against unfair practices by majority shareholders.
Having an established conflict resolution mechanism in the agreement can help the corporation handle internal disputes more effectively and quickly.
Stability and Continuity of Business:
The agreement can cover eventualities such as death, disability, or bankruptcy of a shareholder, providing procedures for handling such scenarios in a way that allows the business to continue operating smoothly.
Clearly articulated rules regarding when and how dividends will be paid can minimize disagreements amongst shareholders.
The agreement can define terms under which a shareholder can exit from the company, creating clarity and reducing potential friction.
Why should I hire an attorney to create a shareholder agreement?
Hiring an attorney to draft or review a shareholder agreement is a wise investment. It can provide reassurance and security knowing that a professionally-drafted document protects the interests of all involving parties. This legal foundation may save issues, money, and stress in the long run and comes with the following advantages:
Protection of Interests:
An attorney ensures that the rights and interests of all parties are adequately protected. They can identify and draft critical provisions to protect the company and its shareholders.
Expertise and Experience:
Attorneys have the necessary expertise and proficiency to draft detailed and robust agreements. This depth of knowledge is especially useful in anticipating potential future disputes or challenges.
Each business is unique, so a standard agreement may not cover every scenario. An attorney can tailor the agreement to the specific needs and circumstances of your business.
An attorney can ensure compliance with federal, state, and local laws that govern corporations and shareholder relationships, safeguarding against potential legal problems down the line.
Clarification of Terms:
An experienced attorney can make sure that the agreement is unambiguous, clear, and easy to understand, thereby minimizing potential misunderstandings or disputes.
Lawyers can propose effective mechanisms for resolving disagreements, which can help you avoid costly and time-consuming litigation.
Attorneys are skilled at spotting issues that may not be immediately apparent to someone without legal training. They provide a thorough review to catch any oversights or gaps.