Shareholder Agreements - Do You Have One?

I recently read the following blog entry from Open Forum Blogs. It was a great reminder of why you need to have an up to date shareholders agreement and things that should be included in your agreement. I think this is a great summary of goals and necessities of a good shareholders agreement. If you have a business that is not a corporation the concepts still apply and can be included in partnership agreements and operating agreements.

Shareholder’s Agreement: What It Is and Why You Need to Review Your Own Nora Dunn for Wisebread June 29th, 2009 - 03:11 PM When you get into business with a partner or partners (be they a friend, family member, or simply a business acquaintance), you do so with the best of intentions. As such, in many cases, the apparent need for a Shareholder’s Agreement goes unnoticed. In fact, you may be embarrassed to bring up the idea since it seems like a complicated legal mess that screams of a business version of a “pre-nup”: something that protects your interests if the business relationship goes belly up for some reason.

But a Shareholder’s Agreement is so much more than just something to deal with the breakdown of a business relationship. Life happens while we are busy making plans, and sometimes life’s happenings can throw us curve balls that will affect not only our relationships, but the business. Disabilities, untimely deaths, marriage breakdown, and simple falling-out between partners can mean disaster if these scenarios (and others) have not been given due consideration.

Also known as a Buy-Sell Agreement, a Shareholder’s Agreement is designed to help you and your business navigate life’s tricky twists and turns. Although the reference to “shares” implies it is limited to corporate ventures, similar partnership agreements can be drawn up for other business structures.

Among other things, a Shareholder’s Agreement will contain terms that come into play when a partner:

• Wants to sell their share of the business.
• Becomes disabled.
• Dies.
• Has life changes that affect their personal estate plan.

Advantages of having a well-drafted Shareholder’s Agreement include:

• Having a road map to follow when an unexpected change happens.
• The value of the business is preserved.
• Taxes are minimized.
• Surviving (or remaining) owners are protected, as is the business.
• Elimination of miscommunications and discord between surviving family members (of a deceased or disabled partner) and the other business partners.

10 common clauses found in a Shareholder’s Agreement

1. Valuation
2. Restrictions
3. First Right of Refusal
4. Shot-Gun Clause
5. Disability
6. Death
7. Retirement
8. Marriage Breakdown
9. Funding
10. Payment

As with any legal agreement, a Shareholder’s Agreement is something that requires a lot of conversation and thought prior to walking into your lawyer’s office. This is not conversation that will likely come easily or naturally to you and your partners, and so your financial planner or accountant may be able to help you discern the issues that are of importance.

Life’s curve balls do not have to have tragic consequences. Review your current Shareholder’s Agreement for viability, and if you don’t have one – well then, you know what to do.

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