Many closely-held businesses install Shareholder Agreements for a variety of reasons. The most important reason is to create a mechanism for transfer of ownership to the remaining owners in the event a shareholder dies or retires from service as an employee of the company. A well drafted Shareholder Agreement will cover:
- What events trigger a purchase and sale of stock (e.g., death, disability, retirement, termination of employment)
- Methods of valuing stock for purposes of determining the purchase price
- Funding of the buyout (e.g., installments, life insurance funding, etc.)
- Alternative purchase arrangements to redemptions if the Company cannot lawfully or financially afford to pay the redemption price
- Voting rights shifts
- Creditor protections for selling shareholders
Shareholder Agreements can be important in setting up structures to mediate potential relationship issues that might arise during the tenure of joint ownership among the shareholders. For example, they often provide for “carry along/take along” rights protecting minority shareholders from unilateral sales of voting control without allowing the minority to participate. They also provide an opportunity for companies who have larger numbers of employee/shareholders (e.g. service firms such as consulting and engineering firms) to reassure their minority owners of piggy-back registration rights for their shares in the event of a public offering. Shareholder Agreements often serve as an integral feature in employee equity sharing arrangements such as stock option plans.
Each company has its own unique approach to Shareholder Agreements, and installation of such a program should not occur without a comprehensive and detailed review of all the ramifications and possibilities of such an arrangement.