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The Mistake of a Business Owner Regarding Shareholder Agreements

Shareholder agreements often evolve over time. That is often due to, amongst other factors, the increased sophistication of the company and the fact that shareholders leave and others join. It is important to review your shareholder agreement and make certain that it is accurate and not in need of changes. The best time to review your shareholder agreement is now, when all of the shareholders are getting along. If you wait until there is a problem, then it becomes difficult, if not impossible, to amend it. The following steps are recommended:

  • Make certain that all shareholders have signed the most current agreement. No one wants to be in a preventable lawsuit where a shareholder is claiming they are not subject to the agreement because they never signed it;
  • Confirm that the shareholder agreement accurately reflects how the parties actually interpret the shareholder agreement. For example, if the agreement states a term that the parties do not follow, then change that term to reflect what the parties currently are doing. If you fail to do so, and there is a disagreement, that increase the likelihood of litigation.
  • Make certain that all shareholders have stock certificates and that the number (and classes) of the shares are accurate. In addition, double-check that all stock certificates have been endorsed by the proper individuals. In addition, make certain that the stock certificate states it is subject to the shareholder agreement.
  • Review the valuation of the corporation and make certain that you are updating the value as outlined in your agreement. Shareholder disputes often involve disagreement regarding the valuation and a situation whereby the shareholder agreement does not take into consideration a disagreement. If your shareholder agreement has this issue, amend the shareholder agreement so that the valuation of the company is set by a specific process. Doing so, will most likely avoid litigation on this issue.
  • Do not take shortcuts. When a shareholder leaves, make certain that there are written documents that clearly memorialize the sale of his or her shares to the Corporation or individual shareholder(s), whichever case that might be and that promissory notes, if any, are in writing and enforceable as drafted.
  • Make certain that the shareholder agreement properly deals with a shareholder’s death, disability, retirement, divorce, bankruptcy and termination from employment.
  • If a shareholder is no longer going to be a shareholder, but will remain as an employee of the company, make certain that any provisions of the shareholder agreement that you wish to remain “enforceable” (if someone is no longer a shareholder, the shareholder agreement is not enforceable against the departed shareholder) are include in a new employment agreement.

Spangler and de Stefano, PLLP assists business owners with shareholder agreements.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.