A shareholder agreement is an optional corporate governance document that should be seriously considered when a new corporation is established. Usually a new business starts up with optimism and clear ideas about where it is going, but in its evolution, unexpected twists and turns can pop up.
Shareholder agreements can help to plan for future surprises. For example, what happens to his or her shares when a major stockholder wants out? How much freedom should a shareholder have to sell stock to whomever he or she chooses? Can the people who set up the business have a future say in how the company will be structured and managed? Can they control who can buy in future stock offerings?
All these and other matters can be addressed by a comprehensive and carefully crafted shareholder agreement. Over the life of the business, the agreement can be amended to take changed circumstances into account. Another benefit of a shareholder agreement is that its terms can help to cut down on the formalities otherwise legally required in certain aspects of corporate operations.
California requires that shareholder agreements be signed and in writing. For a shareholder agreement to be binding on future stock owners, the stock certificate must state that the shares are subject to the terms of the agreement.
While shareholder agreements permit creativity and can cover a wide variety of topics, California law does forbid certain types of provisions such as those that would attempt to change California filing and recordkeeping requirements.
The law provides that shareholder agreements may be used by close corporations (those with 35 or fewer shareholders, often small businesses owned and run by the members of a family), but such agreements may also be drafted by larger corporations.
Some of the more common matters dealt with in shareholder agreements include:
- Repurchase rights: What happens to a shareholder's stock when he or she dies, leaves the company or retires? How will the value be determined? Will the corporation have the first right to buy back the shares? Can the shareholder leave the stock to family?
- Right of first refusal: A shareholder can get an offer to buy his or her stock from outside the company, but before the transaction can occur, the same sale terms must be offered to the other shareholders or the corporation itself.
- Right of first offer: A selling stockholder must offer his or her shares first to other shareholders or the corporation itself, usually at a predetermined price.
- Voting rights: The agreement can set out future voting requirements, arrangements or procedures.
- Nondisclosure requirements: Shareholders may be bound to keep confidential information like trade secrets.
- Corporate management: How will the board of directors look? What are the goals of management? Who will the officers be?
- New stock: What will the terms be for future stock offerings?
Anyone starting up a new corporation should retain legal counsel to help decide whether a shareholder agreement is appropriate. Share your vision for the corporation's future, so that your lawyer can advise you as to what terms you should consider including. A skilled business attorney with experience in drafting corporate startup documents is essential since the terms of a shareholder agreement need to be carefully crafted.
