Why a Shareholder's Agreement is Key for Your Small Business
The formation of your new business venture brings a lot of excitement and goodwill. Everyone is looking forward to a successful and lucrative endeavor. Despite the fact that you and your partner in business are on the same page now, you'll want to take reasonable precautions to ensure that you're protected down the line and prepared for any eventuality. A shareholder's agreement will protect all participants by outlining each party's rights and responsibilities, and anticipating how you will manage growth and change within your organization. This is important because when there is no agreement in place, the court may not be able to decide one, as was the case in Orlinsky v Petraka.
Under section 607.0732, Florida Statutes, a business with under 100 shareholders may enter into a written shareholder's agreement that dispenses with some formalities of the Business Corporations Act.
Why Do You Need a Shareholder's Agreement?
A shareholder's agreement will help you to protect yourself in the event that the needs of your business change down the line. Businesses are constantly in flux for a variety of reasons. You may be growing quickly and adding new stockholders, or you may be interested in dissolving or selling your enterprise. No matter what changes your business faces, you'll want to have a legal document in place to ensure that you're prepared to meet them head-on.
Questions to Ask Yourself:
Have you considered what would happen if a shareholder passed away or was otherwise prevented from executing their responsibilities? What if a stockholder is interested in transferring their share to someone else? What do you do in the event that shareholders don't see eye to eye? A shareholder's agreement will protect every party so that no unforeseen changes are catastrophic for your business, and nobody is pushed out without legal recourse. Without a shareholder's agreement, you'll be subject to your state's default rules in the case of a dispute, which can result in someone losing ownership of an endeavor they worked hard on.
What Will Your Shareholder's Agreement Include?
A shareholder's agreement typically includes the following:
Information on control of the company
Protection for the majority and minority owners
Plans for how to handle important issues in advance
Enhanced control of the transfer of shares to new owners
Agreements related to dissolution (this will include specific plans on how to approach issues of deadlock and dissension)
A shareholder's agreement does not eliminate liabilities that arise as the result of a breach of duties, and cannot eliminate any fiduciary responsibilities if they are owed.
What Happens in Case of Dispute?
According to the Yale Law Journal, your shareholder's agreement can also help you to outline action plans for "choice and removal of directors" and "appointment and removal of officers." This is key to determining who holds what position within your business, and if someone is not upholding their end of the bargain or meeting their responsibilities as a director, you can reasonably determine how to proceed.
If your enterprise has only two stockholders and a dispute arises, you may also refer to your shareholders' agreement for a resolution, by instituting a "shotgun" or buy/sell agreement, or determining your path to meditation.
Other Purposes of a Shareholder's Agreement
A Shareholder's agreement will also help you determine how the stock is divided, how voter share is divided, and how you will deal with any new shares that are issued.
Hiring an Attorney to Draft Your Shareholder's Agreement
Having a plan in place to manage growth and change in advance will enable you to get back to running your business smoothly and effectively, knowing that you are well protected as a shareholder and owner. It's important to hire an attorney to draft a legally binding agreement, so you and your investor associates have a clear understanding of your responsibilities and rights. For more information contact us today to see how we can help protect you and your business.