Most businesses start with a simple and often verbal agreement among the founders or incorporators on what they want the company to accomplish. But disputes can sometimes arise even among corporate founders who are personal friends of each other. Some of them find out that friendship is sometimes not enough to resolve business disputes. This is especially true when the business starts raking in serious money. Suddenly everyone wants to have control.
A shareholder agreement is one of the most effective ways to put in place the process of handling issues and disputes without dragging each other to court. Companies should learn more ways to impose internal regulations within their company, it’s advisable to consult business lawyers who specialize in crafting a shareholder agreement Miami for transparency and order.
Here are just some of the ways by which a shareholder agreement can work as insurance for entrepreneurs.
1. Protection For Controlling Shareholders One of the most important ways that a shareholder agreement would work as insurance for entrepreneurs is to provide a degree of protection for the controlling shareholders. The majority or controlling stake would naturally want to run the company without being hampered by obstruction moves from the minority that can’t be resolved.
Keep in mind that the controlling shareholders would most likely be able to run the daily company operations smoothly even if the minority is uncooperative. Although the majority stake won’t be able to make big decisions that would affect the company if it doesn’t have the support of the minority.
For instance, when the controlling shareholders want to go into a merger with another company or sell their shares, they might encounter issues if the minority won’t cooperate. Consequently, the majority won’t be able to sell their shares at a high price if the minority doesn’t support their decision. This might also turn away potential investors or buyers if they see these unresolved control issues inside the company.
A shareholder agreement can work as insurance to prevent this scenario from happening. Shareholders can include a ‘drag along’ provision in their shareholder agreement. It’s a provision that would permit the controlling shareholders to compel the minority to accept an offer from a prospective buyer at the price desired by the majority. In other words, it would empower the majority to ‘drag along’ the minority to the sale. Without this, the majority’s plan to sell the company might not push through because of the minority’s opposition.
2. Protection For Minority Shareholders
Another important way by which a shareholder agreement can work as insurance is to protect the interests of minority shareholders. The major decisions of a corporation are often decided by the Board of Directors through their own internal rules of majority voting. The day-to-day operations are usually handled by the executive officers and senior managers appointed by the Board of Directors. It’s the minority shareholders who won’t have protection if they don’t have a voice in the Board.
A shareholder agreement can provide a solution to this gap by providing features and provisions to ensure that the rights and interests of the shareholders who don’t belong to the controlling stake are protected. Here are some of the features and provisions that can be included in the shareholder agreement:
· The shareholder agreement can provide that the minority shareholders would be entitled to elect at least one (1) representative to the Board of Directors.
· It can provide that those belonging to the minority should elect only those persons who have been designated as the nominees for the minority shareholders
· In a closely-held corporation, the shareholder agreement may even allocate certain specific executive office or senior management positions to be held by nominees of the minority shareholders. It may include a requirement for the Board of Directors to vote to keep these minority shareholder designees and appointees in their positions
There are also corporate issues and matters which would require the vote of the minority shareholders. Here are some of those corporate issues and matters:
· Minority shareholders should have a vote on whether the company may authorize the issuance and sale of more stocks to people who are not yet shareholders of the corporation. This is important because this has the potential of diluting the ownership share of the minority shareholders even further
· Minority shareholders can be given the right in a shareholder agreement to have a say on whether the corporation can borrow more money. It can require that minority shareholders have the right to vote in hiring and firing key executive management officers. Some corporate lawyers also include a ‘tag along’ provision in shareholder agreements. This empowers those who are part of the less than 50% to prevent the majority from reaping a premium out of their controlling stake. In this way, the minority shareholders can insist that they be included in the sale especially if it involves an offer to buy shares at premium prices
3. Limitations On Sale Or Transfer Of Shares
Limitations on the sale or transfer of shares can also be included as features in a shareholder agreement that could serve as insurance for the current set of shareholders. Shares of stock in any corporation are generally transferable from the shareholder to anyone willing to buy the stocks. But there are some shareholders who might have reservations about allowing certain people to become part of their corporation.
The shareholder agreement can put restrictions in place to prevent unwanted outsiders from becoming owners of the corporation. For instance, they can require that the sale or transfer of shares should have the unanimous approval of all shareholders. It can also give the current shareholders the right of first refusal over the shares which are going to be sold or transferred.
4. Provide For Rules On Transfer Of Shares
When a shareholder dies, his or her shares would have to be transferred to their heirs or to those persons designated in the decedent’s will, if there is one. But sometimes issues will arise about the transfer of these shares such as disputes among the heirs.
Another scenario is when the creditors of the decedent will contest the ownership of the shares left by the decedent. Some shareholders might also want to exit from the corporation for many various reasons. The shareholder agreement can provide the rules on how the transfer of shares would be handled in such cases. Moreover, it could also provide the procedure should the company decide to buy back the shares.
5. Establish A Dispute Resolution Mechanism
Another way by which a shareholder agreement can work as insurance for entrepreneurs is by creating and establishing a dispute resolution mechanism for internal disputes. The current shareholders can agree on a framework, mechanism, and procedure for resolving issues that may arise between shareholders. These issues can be about anything from how the company is being run to whether additional stocks should be authorized and issued to raise money.
If the company doesn’t have an internal mechanism for resolving disputes among shareholders, things can get out of hand. When shareholders can’t set aside their differences, they’re going to drag each other to court. These litigations on corporate disputes can often be long-drawn and counterproductive.
Conclusion
There are many ways by which a shareholder agreement can work as insurance for the entrepreneurs or current shareholders of a corporation. It can provide protection for the controlling shareholders and minority shareholders as well. A shareholder agreement can put in place specific restrictions and rules on the transfer of shares. Additionally, it can also create and establish an internal dispute resolution mechanism for intra-corporate disputes.
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