A shareholder agreement is a contract between co-owners/shareholders of a company that sets out the rules for how a company will operate.
It is advisable to have a shareholder agreement whenever you form a company with arms-length third parties.
The main topics covered in a shareholder agreement include:
- Day-to-day operations
- Financing the company (bank loans or shareholder advances to the company)
- Signing authorities for bank accounts and contracts
- How company money will be distributed
- Meeting rules for directors, officers and shareholders
- Rules that govern the transfer of shares (including right of first refusal; “piggy back” clauses; “shot gun” clauses; and death of a shareholder)
- Disability, bankruptcy and divorce of a shareholder
- Valuation of the shares of the company
- Arbitration for any disputes
- Non-disclosure, non-competition and non-solicitation
If a shareholder agreement is not entered into during “good times”, then if the business relationship takes a turn for the worse, it will be too late to implement the above rules. The result can be costly and lengthy court battles to determine a buy-out process and valuation.
Should you wish to discuss shareholder agreements, please contact Kay Law today.