negotiating shareholder agreement

Questions You Should Ask When Negotiating a Shareholder Agreement

Negotiating shareholder agreements tends to be a complex endeavor. Any person or entity that owns a share of a company is considered to be a shareholder. A share represents an ownership interest in the company and may grant the shareholder voting rights as well as the right to receive dividends and other benefits from the company. The rights and responsibilities of a shareholder to a company and vice versa makes it exceedingly important to have a solid shareholder agreement in place which outlines both how the company should be operated and the rights and responsibilities of the shareholder. A strong shareholder agreement will work to help ensure that the shareholder relationship is protected and that shareholders are treated fairly.

What to Ask During a Shareholder Agreement Negotiation

There are a number of important provisions that should be included in a shareholder agreement. In addition to describing company operations as well as the rights and obligations of the shareholders, the agreement should establish how the relationship between the shareholders themselves will be regulated and how the company will be managed as well as information regarding the ownership of company shares. Because there is so much that should be included in a shareholder agreement, there are many questions that should be asked in the midst of shareholder agreement negotiations.

For starters, it should be asked as to who will actually be included as a party to the shareholder agreement. Surprisingly, this is an often-overlooked question. For example, should the company be included as a named party to the shareholder agreement? Yes, this is usually best practice, especially if the agreement creates obligations for the company to uphold.

What will governing the company look like? Asking after how a company will be governed is also a great question to ask during the shareholder agreement negotiation process. The agreement, after all, should clearly set forth whether or not a board of directors will oversee the company and, if so, the number of directors there will be and whether shareholders will have the power to appoint or remove a director from the board.

The power of a shareholder to approve or deny certain company decisions will likely play a significant role in the negotiations over the shareholder agreement. Thus, what matters require shareholder approval should be asked after. While most states have laws in place that require shareholder agreement on certain company dealings, these rights can be augmented through the shareholder agreement. This means that the agreement itself should outline what company matters will require a vote of the shareholders and what matters will require something like unanimous consent. Furthermore, whether voting rights will be reserved only for shareholders who hold a particular class of shares should also be addressed.

There are many other questions that should be asked during negotiations. Questions regarding restrictions placed on the shareholders by the agreement can be particularly important. Are there any restrictive covenants that will be placed on shareholders? Is there a non-compete clause or non-solicitation clause that will be included in the shareholder agreement? Are there restrictions on the transfer of ownership shares in the company? These are important questions that should be asked and answered in consultation with your attorney. 

New York City Business Law Attorney

Do you have questions about a shareholder agreement? Do you need the benefit of sound legal counsel to protect your rights in the negotiation and establishment of a shareholder agreement? Woods Lonergan is here for you. Contact us today.