Your Clients’ Closely Held Corporation Needs a Shareholder Agreement
A shareholder agreement is a cornerstone document for any corporation, outlining the rights and obligations of shareholders. Understanding the intricacies of these agreements is crucial for advising clients effectively. This blog post delves into the three primary points of a shareholder agreement: ownership and share transfer, decision-making processes, and dispute resolution mechanisms.
1. Ownership and Share Transfer
One of the fundamental aspects of a shareholder agreement is the restriction on share ownership and share transfer. In the absence of a restriction on transfer, shares of stock in a closely held corporation are freely transferrable.
A properly drafted shareholder agreement clarifies who can own shares, how shares can be transferred, and restrictions on share transfers. For instance, many shareholder agreements include a right of first refusal, ensuring that the corporation and existing shareholders have an opportunity to purchase shares before they are offered to parties who are not currently shareholders. A right of first refusal provision helps maintain control within the existing group of shareholders and prevents unwanted third parties from gaining influence in the corporation.
2. Decision-Making Processes
The decision-making processes within a closely held corporation are another critical component of a shareholder agreement. This section specifies how decisions are made, including the voting rights of shareholders and the procedures for calling and conducting meetings. It may also outline the roles and responsibilities of the board of directors and any special voting requirements for significant corporate actions, such as mergers or acquisitions. In addition, voting of shares held by shareholders of older generations may need special provisions, such as a proxy coupled with an interest. Clear guidelines in this area help ensure that all shareholders are aware of their rights and the procedures for making important decisions, thereby promoting transparency and reducing the potential for conflicts.
3. Dispute Resolution Mechanisms
Disputes among shareholders in closely held corporations can arise for various reasons, and having a predefined mechanism for resolving these disputes is essential. A shareholder agreement often includes provisions for mediation, arbitration or buyout rights as preferred methods of dispute resolution, rather than litigation. These mechanisms can provide a more efficient and less adversarial way to resolve conflicts, preserving business relationships and minimizing disruption to the corporation’s operations. Additionally, specifying the jurisdiction and governing law for any disputes can provide clarity and predictability for all parties involved.
Conclusion
In summary, a well-drafted shareholder agreement for a closely held corporation addresses key areas such as ownership and share transfer, decision-making processes, and dispute resolution mechanisms. Understanding these primary points is essential for providing comprehensive advice to clients. By ensuring that these elements are clearly defined, a shareholder agreement can help maintain harmony among shareholders and contribute to the smooth operation of the corporation.
Beresford Booth has decades of experience in drafting shareholder agreements and we would be pleased to help you with your shareholder agreement.