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The Key to Drafting an Enforceable Shareholder Settlement

TheParzivandLaw Firm, PLLC Aug. 3, 2023

Shareholders of a business enterprise take risks. They invest money and resources and count on getting a solid return on their investment. Because there are inherent risks, the best tool shareholders and the business can have is a carefully crafted shareholder settlement agreement.

Unfortunately, not all shareholder settlement agreements are well-written documents. That leaves shareholders exposed to potential disputes that might have been avoided. Moreover, poorly written agreements may be successfully challenged in court. It all can become quite costly for individual shareholders and the business itself. 

The Parzivand Law Firm, PLLC prides itself on drafting enforceable shareholder settlement agreements for clients in Stafford, Sugar Land, and Fort Bend County, Texas. They begin by helping you understand what a shareholder settlement is and what makes it enforceable. Here’s what you should know.  

What Is a Shareholder Settlement?

A shareholder settlement is a legal document, often used by small corporations and limited liability companies (LLCs) who rely on shareholder investments to fund the enterprise. The purpose of the agreement is to establish how potential conflicts will be resolved should they arise down the road. For example, the settlement may stipulate that disputes will be resolved by mediation and not by litigation.  

The shareholder settlement also lays out how shares will be bought and sold as the company ages. Moreover, a shareholder settlement may be drafted to address a specific lawsuit or other legal action brought against the company.  

By signing the shareholder settlement, each shareholder agrees to abide by the covenants therein, which is why the agreement needs to be thorough, clear, and comply with the law. 

What Are the Key Provisions of an Enforceable Shareholder Settlement?

Overall, shareholder settlements must be clearly written, leaving little room for interpreting the language of the document. This ensures the shareholders understand what they agree to, and if challenged, the court understands the intent of the settlement agreement. Moreover, all signers of the settlement must be actively involved in negotiating and drafting it with due consideration and must agree that all provisions of the settlement are original and non-duplicative. 

Although every shareholder settlement is unique, there are some key elements that must be included to make it legally enforceable. Enforceable provisions include the following:  

It should detail the release of claims by shareholders against the company, its leadership, employees, and other parties. Most often, this is used to release claims related to breaches of fiduciary duty, fraud, or other liability.  

The covenant not to sue is a critical element. This is the provision under which shareholders agree to use mediation, arbitration, or another form of alternative dispute resolution to resolve conflicts, rather than engaging in litigation.  

The shareholder settlement should also address the company’s legal representation, clarifying the business attorney’s role in the organization, as well as in dispute resolution.  

The agreement should detail how shares will be purchased, sold, and transferred. Moreover, the agreement should address how dividends will be distributed.  

Voting rights of shareholders and voting procedures, such as quorums and majorities necessary for passage, should be included, as well as other governance and management issues.  

Representations and warranties must be included. Representations are facts presented as of the date the document is signed. Warranties indemnify the shareholder should anything presented as fact be later disproved.  

The agreement must state and by signature, it is acknowledged that each shareholder is entering into the settlement with full knowledge and upon use of their own judgment.  

Finally, the agreement should acknowledge that it is fair to all shareholders and was negotiated, drafted, and entered in good faith.  

What Are the Potential Pitfalls of a Shareholder Settlement?

As you can see by all the provisions needed in an enforceable shareholder settlement agreement, a major potential pitfall is not addressing each and every one of them or worse, not having a shareholder settlement at all.  

Some other potential hazards include: 

  • Failure to include the level of detail necessary; 

  • Releasing too many parties from claims or too many future claims; 

  • Failure to include an agreement regarding confidentiality; 

  • Agreement to indemnify too many parties; and, 

  • Failure to provide accurate financial and other disclosures. 

Let Our Experience Be Your Guide

You may now be wondering: How do I draft an enforceable shareholder settlement? The answer should be clear. You should work with a business attorney experienced in crafting careful and thorough shareholder settlement agreements in Stafford, Texas, and throughout the surrounding areas.  

The attorney of The Parzivand Law Firm, PLLC has that experience. He has worked with numerous small corporations and LLCs on creating shareholder settlements, negotiating their terms, and challenging agreements when they are disputed.  

If you want knowledgeable legal counsel in matters related to shareholder settlements, look no further. Call The Parzivand Law Firm, PLLC today to schedule a consultation. Let them help protect your interests.