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What Is a Shareholder Agreement and How Can It Help Your Business?

May 1, 2024

Two businessmen discussing work.If you own a business with one or more partners, then having an ownership agreement that sets
forth your various rights and responsibilities can help in the case of unforeseen circumstances.
These agreements are known variously as ownership, partnership, shareholder or membership
agreements, depending on the structure of your business, but they are all designed to do the same
thing. They can assist with transitioning a business through a wide range of difficulties such as
the death or disability of an owner, resolving fundamental disagreements on management, and
setting forth the rules for the sale of a member’s interest, among other challenges.

Here are some of the important provisions that may be desired in an ownership agreement:

  1. Clarify Ownership Structure and Value: The agreement defines the interests of each
    owner in the business. It outlines the number of shares or membership percentage held by
    each owner. It can also set a value for each owners’ share or a formula through which the
    value can be calculated in the future. This clarity helps prevent disputes over ownership
    and reduces the likelihood of misunderstandings.

  2. Protect Owners’ Rights and Resolve Disputes: The agreement sets out the rights and
    privileges of owners, including voting rights, dividend entitlements, and the right to
    inspect corporate records. It ensures that owners are treated fairly and equitably,
    protecting their interests within the company. And in the event of a fundamental dispute,
    the agreement can provide mechanisms for resolving these quickly with minimum
    disruption, such as mediation or arbitration.

  3. Establish Decision-Making Procedures: Ownership agreements typically outline
    procedures for decision-making within the business, including voting procedures for
    major actions such as mergers, acquisitions, changes to the company's capital structure,
    borrowing and adding or removing owners. This helps streamline decision-making
    processes and ensures that key decisions are made in accordance with agreed-upon

  4. Define Management Roles: Ownership agreements often address the roles and
    responsibilities in the management of the company. This may include provisions
    regarding the appointment of directors or managers, the selection of officers, and the
    delegation of day-to-day management tasks. Clear delineation of management roles helps
    prevent conflicts and ensures efficient corporate governance.

  5. Address Transfer of Shares: If an owner desires to sell their interest, will that be
    allowed? What happens in the case of bankruptcy or other seizure of an owner’s assets by
    creditors – what will happen to the business? Ownership agreements typically include
    provisions governing both voluntary and involuntary transfers of an ownership interest.
    Provisions may include rights of first refusal, restrictions on transfer to third parties or
    limits on voting rights, and procedures for selling or transferring to other owners. These
    provisions help maintain stability within the ownership structure of the business and
    prevent unwanted third-party involvement.

  6. Address Other Exit Strategies: Ownership agreements often include provisions
    addressing exit strategies, such as buy-sell agreements or provisions for the orderly
    disposition of shares in the event of death, disability, retirement, or voluntary withdrawal from the company. These help ensure continuity of ownership and facilitate smooth
    transitions during unexpected periods of change.

  7. Protect Minority Shareholders: For minority shareholders who may have limited
    influence or control over business decisions, an ownership agreement can provide
    safeguards to protect their interests. This may include provisions for minority protections,
    such as veto rights over certain decisions or mechanisms for resolving disputes with
    majority owners, whether individuals or a group of owners acting as a block.

In summary, an ownership agreement is a vital tool for establishing clear guidelines and
expectations among stakeholders, protecting their rights and interests, and promoting effective
governance. Whether your business is large or small, having a well-drafted agreement can help
mitigate conflicts, preserve value, and promote long-term success. Of course, No agreement can
guarantee that things will always go smoothly or that there will not be difficulties trying to
resolve challenges. But having an ownership agreement can certainly help avoid unnecessary
conflicts or aid in finding resolution if they should arise.