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What should be included in a shareholder agreement?

Going into business with others is a lot like getting married. The hope at the outset is positive and the legitimate expectation of the parties involved is that they will face the difficulties that come together and share in the eventual rewards. It doesn't always work out that way.

One way many marrying couples in Texas seek to manage risk is to lay out clear plans for what should happen in the event of a divorce. This is done through a prenuptial or perhaps an antenuptial agreement. Similarly, individuals entering a business relationship deserve the benefit of knowing that there is an exit strategy should things not work out as planned. The way to do that is through a Shareholders' Agreement.

What to include

What this document contains is up to those who sign it. However, there are certain things that those with experience in dealing with business disputes understand need to be part of the agreement package. These include:

  • Clear statement of responsibilities: Business success is always the objective, but how it's achieved can vary. A shareholders' agreement should show clearly what role each partner or shareholder will fulfill in the effort and the benefits they will be entitled to.
  • Plans of action in the event of change: Change is the one constant in life. Business is no different. Business partners need to be ready to spot changes and adapt to them. Having a plan for how that happens can be part of an agreement. This might even include directions on dissolving the relationship.
  • Management of transfers of shares: This is a way of ensuring that company control stays in the hands of the founding parties. It might include provisions that require shares to be transferred back to the business or to other existing shareholders and barring sales to outside third parties. The agreement might also establish share transfers in the event of a partner's death.

It may not be possible to avoid all potential sources of litigation, but with proper planning in consultation with skilled attorneys, it can be possible to minimize damaging actions.

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