Corporate Shareholder Agreements

Shareholder agreements govern the relations among owners of a corporation. They set out the owners’ rights, and their responsibilities to each other. No corporation should be without one. Our attorneys have decades of experience drafting shareholder agreements which protect our clients’ rights.

Owners need to choose the form of business that best suits their unique needs. In many cases the corporate form may suit them best. Corporations have many advantages, primarily the fact that owners are normally shielded from corporate debts.

Owners generally go into their ventures with the highest of hopes, and great faith in their fellow owners. They generally see eye-to-eye on most matters affecting the business. But disputes often arise down the road.

Just like fences make the best neighbors, well-written shareholder agreements serve to ensure the best relationships between owners. Because these agreements set out the shareholders’ rights and responsibilities, they can normally resolve disputes quickly, and allow the owner to continue doing what they do best—running the business. When disputes do occur, the shareholder agreement will determine what the owners’ remedies are. In this way, the owners get to take their fate into their own hands.
Some examples of what a well-drafted shareholder agreement can do for a corporation include:

• A well-written shareholder agreement will lay out how the business will be managed. It will set out the responsibilities, authority and compensation of officers and directors.
• The shareholder agreement will govern exactly what percentage of the corporation each shareholder will own, and what the owners’ salaries will be if they are to be an active worker for the business. Regardless of whether a shareholder is active or not, the shareholder agreement will set out the terms for the sharing of profits and losses.
• The shareholder agreement will set out the requirements for capital contributions to the business by the shareholders, and the steps required to make new capital calls.
• The shareholder agreement will include procedures for resolving disputes, including possibly mediation or arbitration.
• The shareholder agreement will also contain procedures and criteria for responding to shareholders who are failing to meet their obligations to the business, or who are harming the business or her fellow shareholders.
• A well-drafted shareholder agreement will detail procedures for voting, and identifying what matters need to be put to a vote.
• The shareholder agreement will establish the shareholders’ rights when the company is dissolved, or when one of them dies or becomes disabled.
• Shareholder agreements often contain restrictive covenants prohibiting the owners from competing with the corporation.
• A well-drafted shareholder agreement can set out the ability of owners to force a buyout of their interest, and can avoid pitfalls in succession planning.

When disputes between owners occur, the first place to look is the shareholder agreement. It is important that shareholder agreement is clear and comprehensive. When it does not govern a particular topic, that will be resolved by the rules of the New Jersey Business Corporation Act.

Our business attorneys are experienced at drafting shareholder agreements which meet our clients’ needs, and lay the foundation for a successful business venture.
We also have decades of experience litigating shareholders disputes. This allows us to anticipate problems and draft shareholder agreements to avoid them – and also so that they will work to our clients’ advantage should a dispute wind up in court. Indeed, it is important to draft agreements so that they protect the rights of minority shareholders, as well as those with a majority ownership interest.

It is important not only to have an agreement that works for the business when it is new. As businesses grow and evolve, it is important that their governing agreement evolves with them to meet the new reality.

Thus, while shareholders agreements are not required by law, they are vitally important to businesses. It is important to have one before trouble starts—afterward it may be too late. Indeed, although not required, lenders will normally demand to review a shareholder agreement before lending the business any money or opening a line of credit.

Please e-mail us or call (973) 890-0004 to discuss drafting a shareholder agreement.