August 2015

The Right Shareholders’ Agreement

Some responses are fairly predictable. When you mention Shareholders' Agreements to business owners, most have a somewhat guilty look. We hear things like "Ours is old and I was never really convinced that it covered all the points in the right way. We need to look at that again."

A common misconception is that if you can find the right Shareholders' Agreement form, then it will have the correct answers for your situation. Like most things, a job well done requires more effort than that. The only right form of agreement is the one that you develop, talking through all of the major points. Once developed, in order to remain current, a Shareholders' Agreement should be revisited on a regular basis and updated to reflect changing circumstances.

Shareholders do eventually pass away. If you are not sure what happens in this case, you should review your agreement. Does the survivor have the right to purchase the decedent's shares? Or will they pass to the family and negotiations can begin there? Alternatively, does the survivor have the obligation to purchase the shares? If so, is there a stated price? A formula? Instead, it may be that an appraisal of the business will be required. Any of these results can be right - or wrong - depending on the wishes of the owners involved.

Of course, death is not the only circumstance that should be covered. You can also map out the company's future regarding governance, disability, disputes, involuntary interruptions such as divorce and bankruptcy, and many other points. Developing a good Shareholders' Agreement is a lot like developing any good plan: the final document is important, but the process of developing it may prove just as valuable in laying the groundwork for even greater future success.