Shareholder Agreement – Four Important Considerations

We often advise our clients on the importance of having a solid shareholder agreement in place. Many times, this is one of the most heavily negotiated documents a company will encounter, and sometimes it involves the shareholders negotiating against each other. Shareholder agreements are not required under state law, but are very helpful, and we highly recommend them to our corporate clients. Here are four important considerations for your shareholder agreement.

 

  1. Stock Transfer Restrictions. Shareholders should be able to sell and exit the company if they want, but only in a manner that protects the other shareholders. Many companies will require a right of first refusal (“ROFR”) in favor of the existing shareholders before any individual shareholder can sell his/her shares.
  2. Transferability upon Death or Disability. Shareholders should carefully consider and document the mechanisms in place governing what happens to the shares of a shareholder that dies or becomes disabled. Most companies will allow share transfers to an immediate family member, but will not allow the family member to be a voting shareholder unless the recipient agrees to abide by the terms of the shareholder agreement.
  3. Valuation. How to value the shares is an important consideration to consider in advance, especially if the company retains the ROFR mentioned above. Some companies prefer the simpler (and less expensive route) of reference to a financial statement metric. Other companies agree to use a certified appraiser that will objectively engage in a valuation of the company and its shares. 
  4. Covenants not to compete and not to solicit. Shareholders may want to agree upfront that when a shareholder does eventually leave the company, he/she is not allowed to directly compete against the company nor solicit the company’s customers. This is important of course because shareholders in a closely held company often have insight to the inner workings and proprietary information of the company and to some of the company’s key customers. Of course, it is important to keep in mind, that non-compete covenants should be reasonable in geographic and durational scope.

 

For assistance with Shareholder Agreements, or other legal needs related to your business or estate planning, contact Fournier Legal Services for a free consultation at jfournier@jeflegal.com or 860.670.3535.