If you have formed a Corporation, your company has shareholders. If you have more than one Shareholder, you should have a Shareholder Agreement.
Shareholder Agreements provide rules for how a company runs. They allow shareholders in a business to avoid disputes. They also provide a mechanism for dispute resolution should a dispute arise. Importantly, they provide for a smooth transition in the event that a Shareholder wants to sell his or her shares, or in the event a Shareholder dies or becomes disabled. They also improve the odds of success by helping shareholders focus on the details of the business.
Shareholder Agreements are important for:
- New businesses with more than one investor by forming and clarifing how the business will operate;
- Existing businesses that face disputes among owners of a business; and
- New and existing businesses with shareholders who want to protect their interest in a company and provide for the sale and transfer of shares in the future.
A Shareholder Agreement is a contract. It provides specific, concrete details about the roles and duties of each shareholder, as well as voting rights of the Shareholders and provides direction for how certain actions should occur. The goal is to clarify, in writing, how the business operates and to establish the rights and responsibilities of the shareholders.
Specifically, Shareholder Agreements address:
- Changes in shareholders, including the transfer of shares, what happens when a shareholder dies or is unable to fulfill his or her duties, and who is qualified to be a shareholder and/or officer
- How additional shares are issued
- What actions must be approved by shareholders and what percentage of approval is needed
- Valuation of shares
- Distribution of dividends
- Management of the company
- Non-compete obligations
- Dispute resolution procedures
- Rights and obligations of shareholders
- Any other issues necessary to address
Importantly each issue above is handled differently depending on the specific industry of the company. There are also differences in how shareholder agreements are handled from one type of corporation to another.
It’s important to work with an experienced attorney when creating a Shareholder Agreement because there are so many factors to consider and so many differences from company to company. Harms & Harrigan LLP can help your business create a Shareholder Agreement specific to your corporation and your industry.
Does a Company Need a Shareholder Agreement even If It Has Bylaws?
The short answer to this question is yes. Even if you have other governing documents in place, a company that has shareholders should still have a Shareholder Agreement. Bylaws set forth the purpose of the company and the rights and responsibilities of owners and managers. They are required under New York State Corporations Law.
Although Shareholder Agreements are not required in New York State, in order to avoid costly and time consuming disputes and litigation, it is strongly recommended that a corporation with more than one Shareholder consider having a Shareholder Agreement.
If you are ready to create a Shareholder Agreement or your team has discussed the need for one and you would like to know more, we can help. Contact Harms & Harrigan LLP for more information or to schedule a consultation with one of our experienced business law attorneys.