You may start a business with people you trust and expect the relationship to last. Over time, however, owners may disagree about money, control or the company’s future.
A shareholder agreement cannot prevent every conflict, but it can create rules before conflict begins. These agreements are often easier to create when shareholders have a good working relationship.
Common shareholder agreement provisions
A shareholder agreement can cover issues that may create conflict between owners. It can set rules for situations such as:
- What happens when an owner leaves the company
- How owners will determine the value of a shareholder’s interest
- Whether owners can transfer shares to outside parties
- Which decisions need shareholder approval
- How owners will resolve a deadlock
- What rights minority shareholders have to receive information or approve certain actions
These provisions give owners a way to handle issues before they become disputes. For example, a buy-sell provision can explain what happens to an owner’s shares after they leave. Voting rules can also show how shareholders will make major decisions.
Shareholder agreements vs. bylaws
Corporate bylaws set the basic rules for how a corporation runs. They usually cover the board, officer roles, meetings and other company procedures.
A shareholder agreement focuses on the owners’ relationship. It can cover issues that bylaws may not address, such as share transfers, buy-sell terms and disputes between shareholders. Bylaws alone may not answer every question that can arise between owners.
Heading off disputes between shareholders
Business relationships can change over time. Owners may disagree about the company’s direction, their roles or the value of their ownership interests. Without a written agreement, owners may have different views about how to resolve these issues.
If you are forming a company, adding a shareholder or reviewing an ownership structure, a shareholder agreement can help define how owners will handle future changes. Discussing these issues before conflict develops can help owners understand how different situations may affect the business and their interests.