What is a Shareholder Agreement

A Shareholders Agreement is a way of anticipating potentially divisive issues that may arise among shareholders and working out ways to resolve them before differences of opinion turn into arguments and escalate into tensions that impact your business. A Shareholder’s Agreement can outline the governance and capital structure of the company; restrict sale of stock to outsiders; delineate the rights and responsibilities of shareholders; and whatever other miscellaneous provisions are necessary to the overall smooth operation of your company.

A too common scenario of business disaster is when BFFs go into business together, full of energy and excitement, as 50/50 shareholders, sure that they will always agree or work out a reasonable compromise. They don’t need a shareholders agreement because they get along so well, have their objectives totally aligned, and besides, they would never have that kind of a falling out because they respect and understand each other.

Then something happens. They disagree on a business opportunity, or one of them takes too much time off – maybe for a very good reason he assumes the other will understand. Aggravations surface, and escalate into a full blown dispute. They stop talking. Business decisions are made unilaterally.

With no Shareholder’s Agreement, we look at the statutory requirements. Voting is by shares of stock; each shareholder owns the same percentage of stock, so each has the same number of votes. Each shareholder is entitled to the same distribution of profits, even if one stops working. The one who is continuing to operate the business may want to vote the other out, but can’t because he doesn’t have a majority of the votes. They are deadlocked. The North Carolina Statutes do not provide a solution.

But if you have a Shareholder’s Agreement, it can provide that in the case of such a dispute, one shareholder can offer to purchase the other’s shares in the corporation for a price he considers fair. The second shareholder then has a period of time to decide whether to accept the offer, or turn around and buy out the first shareholder for the same price. The Shareholders’ Agreement could also designate ahead of time which shareholder would keep the business in the event of such a dispute, and provide a formula for determining the payout of the one who will leave.

Understanding the consequences of disagreement provides an additional incentive to come to an agreement, and increases the likelihood that the business will continue. A well crafted shareholder’s Agreement can keep your business running smoothly.