How to Create a Solid Shareholders Agreement

Originally published by Austin TX Business Law Blog.

It can feel like establishing a business means climbing a mountain of paperwork. It’s true. There is a lot of paperwork involved, but much of it, if not all, is very important to set your business up for success far into the future. A shareholder agreement, for instance, is paperwork that should be drafted and executed with great care. A shareholder agreement establishes a mutually agreed-upon arrangement between the shareholders of a company as to how the company itself will be organized and operated. It should also address the rights and responsibilities of the shareholders.

How to Create a Solid Shareholders Agreement

In order to create a solid shareholders agreement, it should be tailored to meet the unique needs of a company. Drafting a shareholders agreement should happen with the goal of the agreement in mind. The agreement itself is intended to set out specifics of how a company will run, as well as the rights and responsibilities of the shareholders, in order to manage expectations. Should disagreements arise in the course of business, the shareholder agreement will be the touchstone to refer back to in order to resolve the dispute or dictate how the dispute should be resolved. The more detailed a shareholder agreement is, the better it will be at accomplishing the mission of managing expectations and fostering the effective resolution of disagreements.

Because this agreement will have a direct impact on how decisions are made within a company, as well as encouraging the company to run as smoothly as possible, it is incredibly important for it to be drafted with care and include certain necessary pieces of information. For instance, a shareholder agreement should include:

• The names of the shareholders: All initial shareholders should be named in the agreement. The contact information of each shareholder entering into the shareholder agreement should also be included.
• The responsibilities of the shareholders: The agreement should be detailed and specific as to what actions the shareholders are authorized to take in the name of the company. Set forth the business’s expectations of the shareholders. That way, if shareholders fall short of expectations later on, you can point to the agreement they entered into.
• Shareholder voting rights: Just as the responsibilities of the shareholders should be detailed, the rights of the shareholders should be detailed as well, including the voting rights of the shareholders. The agreement should also specify the type of vote required for business decisions to be made. In some cases, you may want to detail what decisions are at the sole discretion of the board of directors.
• Stock information: The agreement should set forth what stock has been issued and what stock may be issued in the future. Any restrictions on the transfer of stock shares should also be detailed.
• Structure of the company: Details regarding the structure of the company should also be set forth in the shareholder agreement. This may include details regarding the board of directors such as how many will be on the board of directors and when they will meet. It should also include things like who the initial officers of the company are and what their titles are.

Business Law Attorney

Do the work on the front end to make sure your business is set up for success far into the foreseeable future. The Kumar Law Firm can help you do this. Contact us today.

Curated by Texas Bar Today. Follow us on Twitter @texasbartoday.

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