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The Importance of Shareholder Agreements for Corporations

TheParzivandLaw Firm, PLLC Aug. 17, 2023

When starting a business, many business owners fall into the trap of thinking that everything will always go smoothly. They think there will be no conflicts because everyone seems to be on the same page about the company’s future. However, no business is immune from disputes and issues, which is why having a shareholder agreement is crucial to protect your company from any possible setbacks, including but not limited to unexpected exits, unregulated transfer shares, and litigation.  

The business attorney at The Parzivand Law Firm, PLLC has years of experience drafting and analyzing shareholder agreements for companies and corporations of all sizes. The law firm assists clients with all aspects of shareholder agreements, including negotiating the terms of the agreement, identifying potential problems, and resolving disputes when they arise. The Parzivand Law Firm, PLLC has an office in Stafford, Texas, but the law firm serves clients throughout Fort Bend County and Sugar Land.  

What Is a Shareholder Agreement?

As the name implies, a shareholder agreement is an agreement signed between shareholders. This document outlines how a corporation should be operated and specifies the rights and obligations of shareholders. These agreements can also contain a number of other provisions, which are fully customizable. Examples of such provisions include detailed valuation provisions for company shares as well as rules on payment of dividends, transfer of shares, exits, governance, and many more.  

Shareholder Agreement vs. Articles of Incorporation vs. Corporate Bylaws

Contrary to popular belief, a shareholder agreement is not the same as articles of incorporation or corporate bylaws: 

  • Articles of incorporation is a fundamental document that regulates the activities of the corporation, including its objectives; and 

  • Corporate bylaws contain guidelines regarding the structure and management of the corporation.  

Shareholder agreements focus on providing clarity and maintaining harmony among the shareholders while also minimizing the disruption and negative impact that potential conflicts can have on a corporation’s operations.  

Why Are Shareholder Agreements Important?

Below are some of the notable advantages of drafting a shareholder agreement for a corporation:  

  • Stability. When a shareholder agreement is written to complement the business’s articles of incorporation and corporate bylaws, it can guarantee stability and provide a framework for the management and operation of the corporation. The agreement can be customized to reflect the corporation’s specific needs and circumstances.  

  • Dispute resolution. One of the greatest benefits of having a shareholder agreement in place is that it provides clarity in uncertain events and serves as guidance toward the resolution of disputes and disagreements.  

  • Protection. One of the primary goals of drafting a shareholder agreement is that it provides protection for the corporation’s majority and minority shareholders. For example, the agreement may specify which decisions require the unanimous consent of all shareholders and which ones don’t.  

  • Share transfer restrictions. A shareholder agreement may contain provisions that restrict the transfer of assets. Not only do these provisions help prevent the company from being taken over by an unwanted third party, but they also regulate how shares can and cannot be transferred between shareholders.  

Since shareholder agreements can be tailored to the corporation’s unique goals and circumstances, the assistance of a skilled attorney may be necessary when drafting the agreement to ensure that all details and nuances are properly addressed.  

Who Should Have One?

While shareholder agreements are not mandatory, having one can help the corporation avoid expensive and potentially damaging disputes down the road. As with all relationships, relationships between shareholders can have their ups and downs. Many businesses mistakenly believe that they will be able to resolve their disagreements amicably. Unfortunately, that is not always the case.  

In fact, even corporations with a small number of shareholders can benefit from having a shareholder agreement in place, as—in addition to providing mechanisms for dispute resolution—these agreements also set out expectations and help all shareholders understand what rights they are entitled to and what their obligations are.  

What Should They Include?

Shareholder agreements are customizable to the needs of any corporation. Thus, the agreement can be drafted in a way that covers anything that meets your specific needs and protects your interests. While the list below is non-exhaustive, some of the things that can be included in a shareholder agreement are: 

  • How the disputes between shareholders should be handled 

  • What shareholders’ duties are 

  • What shareholders’ obligations are 

  • How shares will be acquired, sold, and transferred 

  • Board and shareholders meeting requirements 

  • The boundaries and guidelines to protect shareholders’ interests 

  • The specifics regarding the corporation’s operations and management 

  • When and how dividends will be paid 

  • What happens when a shareholder leaves the company 

  • What happens when a shareholder dies 

You might want to consider working with an experienced attorney when drafting a shareholder agreement to ensure that (a) the agreement is enforceable and legally binding and (b) it accurately reflects your business’s needs and circumstances. 

Protect Your Business

A shareholder agreement is one of the most important documents for a corporation. The business attorney at The Parzivand Law Firm, PLLC can offer legal guidance in drafting a shareholder agreement that promotes stability, efficiency, and harmony in your business. Contact the law firm’s office in Stafford, Texas, to discuss how a shareholder agreement may be necessary to protect your business and your financial interests.