The Articles of Incorporation and Bylaws are certainly important but a shareholder’s agreement is equally important. This agreement decides who is going to have representation on the Board of Directors, what will happen if a shareholder wants to sell out their shares, what happens if there is a deadlock among the shareholders, what will happen if there is an offer to buy the company and much more.
Basically, the shareholder’s agreement decides how the company is going to be governed and what kind of businesses you’ll be involved in. It also defines what kind of control each shareholder has and if their percentage of shares will be maintained or diluted if additional shares are issued.
If your corporation does not have a shareholder’s agreement, you are at risk of losing your rights in the corporation. For example, if there are three shareholders and one decides to sell their interest to a stranger, the remaining two shareholders are now forced to work with this unknown stranger.
Another situation may be that there is an offer to buy the corporation and one minority shareholder could block the whole deal. The shareholders might have a major disagreement and end up deadlocked because nobody has enough control to move forward with a decision and the business stagnates. There are any number of ways you can be abused if you don’t have a shareholder’s agreement.
The best time to get a shareholder’s agreement in place is when the corporation is being formed, when everybody is aligned with the same goals and good will. Also the stakes are lower in the very beginning. You still haven’t invested too much time, effort or money into the corporation yet and, if there is a major disagreement now, it is easier to withdraw from the enterprise completely.
The second best time is now. If you’re in a corporation with one or more shareholders and you don’t already have shareholder’s agreement between you, it is only a matter of time before disagreement or change of vision comes up and then it will be too late. Once that disagreement comes up it becomes much more difficult to get an agreement, if you even can. Act now, the sooner the agreement is in place, the better.
If you’ve read this and you’re thinking that your partners would never agree to a shareholder’s agreement, you might already be in a precarious position. The agreement protects everybody involved so if they aren’t excited about the idea of an agreement the situation might already be going downhill. While you still have the chance, protect yourself and protect your corporation and seek out an experienced attorney to explore what options you do have.