A shareholder agreement is a key tool used to protect your company from hostile takeovers, dilution of your shares, disagreements among shareholders, the forced ousting of founding members, and more.
What Is A Shareholder Agreement?
A shareholder agreement is a contract between shareholders of a company. (Many people believe the Articles of Incorporation and the Bylaws handle this, but they don’t. Those documents govern the relationships among the company, its shareholders, and its officers and directors. They do very little, if anything, to set standards for the ways in which shareholders treat, and interact with, one another.) A shareholder agreement addresses shareholder expectations about their rights and duties to one another moving forward.
Who Needs A Shareholder Agreement?
While most corporations can benefit from a shareholder agreement, they’re not necessarily in all cases. Shareholder agreements are most helpful (and arguably critical) in the following situations:
- Any business with multiple shareholders
- Any business with a founder who is still a shareholder
- Any business with outside investors
- Any business with employees who are also shareholders
- Any business with multiple locations or branches/units (such as franchises)
In each of these situations, there is a potential for hostile takeovers; being forced out of the company; losing control over the direction and vision of the company; or having your investment devalued without your consent. A shareholder agreement can prevent these unexpected and unwanted events from happening in your business.
What Should A Shareholder Agreement Include?
When you work with Skepsis Legal to develop your shareholder agreement, your attorney will be providing detailed and specific advice about what your custom-tailored shareholder should and should not include. Some of the topics we may address include:
- Rights of first refusal, so that if one shareholder wants out of the company, you don’t find yourself in business with an incompatible business partner
- Transfer restrictions that can save you from having your shares diluted, or suddenly finding yourself in a minority voting position when you previously controlled the company
- Protections to ensure that business partners and investors cannot force you as a founding member out of your business without your permission
- Valuation provisions, so that if any shareholders want out of the company, there is no costly legal dispute about how much that exit will cost
Do I Need A Lawyer To Draft My Shareholder Agreement?
A well-crafted shareholder agreement can save you tens or even hundreds of thousands of dollars in attorney fees if and when a dispute arises among the company’s shareholders. Wording is key. It’s also critical that your shareholder agreement considers important tax ramifications, because a poorly drafted agreement can cost thousands or more in unintended tax consequences. State law considerations, and federal securities regulations, may also come into play.
Unfortunately, we’ve seen many form docs purchased online backfire on company founders and shareholders, so this is one area where we suggest proactively working with your attorney to craft a document that will work for you. For most of us, our business is our largest investment. A document that is custom-tailored to protect that investment in the way we want it protected is a critical piece of that investment.
What else do I need to know?
- At Skepsis, we provide legal services for companies operating in WA, OR, CA, ID, and IA.
- For businesses based out of CA: Flat fees for the work described herein are earned as work on the matter is completed, in the amounts that would have been earned had the work been performed hourly, or in proportion to the percentage of the entire project completed, whichever is more. Flat fees will be deposited in the firm’s trust account held in Washington until such time as they are earned.
- For all other businesses: Flat fees for the work described herein are due prior to beginning work, and are earned immediately on receipt and will not be placed into a trust account. This does not alter your right to terminate the attorney-client relationship, and if the relationship is terminated, you may be entitled to a refund in whole or in part if the agreed-upon legal services have not been completed. To calculate whether a refund is owed, we will calculate fees earned on the basis of hourly rates in effect at the time the work was performed.
- Posted pricing is the starting price and based on several assumptions about the scope and complexity of the project. Prior to beginning work, we will evaluate your project and confirm pricing. If your pricing is higher and you do not agree, then any fees paid will be refunded to you.
- We will collect a refundable deposit of $500 prior to beginning work. That deposit will be used to pay government filing fees on your behalf. Any portion of the deposit not required for filing fees will be refunded to you at completion of your corporate formation.