| Many corporations that form using and | | | | happens with the shares when one of the |
| incorporation service never realize one of their | | | | shareholders dies, withdraws from the |
| biggest structural flaws. They are never told that | | | | corporation, becomes disabled, or is not meeting |
| they should have an agreement among the | | | | agreed responsibilities. It requires addressing some |
| shareholders. The reason for this is that a | | | | issues that are not terribly comfortable to deal |
| shareholder agreement requires addressing many | | | | with in the midst of the positive energy that |
| issues that incorporation services are not | | | | usually exists when a new business is formed. |
| equipped to address. | | | | Just a few examples of issues that should be: |
| The bottom line is that if you have more than | | | | 1. What happens to the shares when a |
| one shareholder in your corporation, you should | | | | shareholder dies? Can the other shareholders buy |
| almost always have an agreement between you | | | | out the shares? Can the corporation buy back the |
| regarding the nature of your shareholdings. | | | | shares? Are either required to buy out the |
| What Does A Shareholder Agreement Do? | | | | shares? |
| A shareholder agreement can address a number | | | | 2. What is the value of shares when the shares |
| of different issues. The most common issue, and | | | | are repurchased by the corporation or other |
| indeed the heart of why each corporation should | | | | shareholders? |
| adopt a shareholder agreement, is to set the | | | | 3. If the corporation is required to buy out a |
| terms of succession in the event that a | | | | deceased or withdrawing partner, how are the |
| shareholder dies, wants to leave the company, or | | | | shares valued? |
| is not meeting the agreed commitments to the | | | | 4. What are the performance standards that the |
| corporation and other shareholders. | | | | shareholders expect from one another and can |
| Some Examples | | | | failure to meet these standards lead to a buyout? |
| To illustrate why a shareholder agreement is | | | | If so, what is the value of the buyout and should |
| important, let me paint a fairly common picture. | | | | it be different than valuation upon death? |
| Two friends have a business idea and get | | | | 5. What events should trigger and options or |
| together to form a corporation. They each own | | | | obligatory buyout? Death, disability, |
| 50% of the shares in the company. The company | | | | non-performance are some of the common |
| has some level of success; enough that they | | | | triggers. |
| each can make a good living and are both active | | | | 6. If the corporation is required to buy back |
| in the corporation's business. Everything is moving | | | | shares, how is the buyback financed? coming up |
| along just fine. | | | | with cash or having to borrow money may |
| One day one of the owners is rushed to the | | | | impede the corporation's capital needs. Should life |
| hospital with chest pains and dies of a heart | | | | insurance be used as a way to finance a |
| attack. In terms of the corporation, what happens | | | | repurchase triggered by the death of a |
| now? | | | | shareholder? |
| The remaining owner cannot cover everything on | | | | There are many more issues that a corporation |
| his own. He needs another partner to come in and | | | | should consider when contemplating a shareholder |
| take over some of the responsibilities. But the | | | | agreement. The bottom line is that any |
| estate of the other shareholder still owns 50% of | | | | corporation with more than one shareholder will |
| the shares. Under the will of the deceased | | | | almost always want to have an agreement |
| partner, that partner's wife receives all of his | | | | between the shareholders and the corporation |
| assets. This does nothing to help the remaining | | | | regarding disposition of shares. These are difficult |
| owner. Honestly, he never really cared much for | | | | issues to address because they require dealing |
| his partner's wife who is now is co-owner. | | | | with the termination of the relationship between |
| Additionally, the wife knows nothing about their | | | | the shareholders at the time that the relationship |
| business and has her own business that takes all | | | | is just forming. These issues can cause |
| of her time and attention. You can start to see | | | | controversy at the point in the life of the business |
| the situation that exists. The reason that the | | | | where optimism is crucial. It may be difficult but |
| remaining owner is in this situation is that the | | | | you will be happy down the road that you |
| shareholders did not agree in advance what would | | | | confronted these issues early on in the |
| occur in this type of situation. | | | | relationship. |
| A shareholder agreement should address what | | | | |