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Shareholder Agreements for Smaller Corporations

Shareholder Agreements for Smaller Corporations

A corporation’s shareholder agreement is the contract between the shareholders that establishes rules for how the company will be run and what will occur when specified events happen. All corporations need shareholder agreements, and these agreements should be carefully tailored to the needs of the shareholders and the business.

Smaller, closely-held corporations have vastly different needs than larger corporations whose stock is listed on public exchanges. The primary reason a corporation needs a shareholder agreement is to modify the default rules imposed by state law as to how the corporation will be run. Shareholder agreements can cover a wide range of issues, but they often are used to establish the shareholders’ role within the corporation, how stock can be transferred, and dispute resolution procedures.

The Shareholders’ Roles

In a closely-held corporation, the shareholders are often also the people who are involved in its day-to-day operations. While the default rules allow shareholders to vote for the people who will run the company, they do not establish shareholders as corporate officers. A shareholder agreement can be used to provide that individual shareholders will act as officers or directors within the company.

Stock Transfers

In a publicly-traded company, anyone can purchase a corporation’s stock on the exchange on which it is listed. Because the stock of a closely-held corporation is not available to the public, a shareholder agreement should address how and to whom the corporation’s stock can be transferred. For example, if a closely-held corporation is a family business, the shareholder agreement can specify that a shareholder who wants to sell must first offer to sell his or her stock to the other shareholders.

Resolving Shareholder Disputes

It’s a fact of life that in closely held corporations, shareholder disputes are likely to arise – and in a small business, disputes between individuals can bring operations to a halt. In addition, litigation between shareholders can be expensive, acrimonious, and can even threaten the continued existence of the corporation. For this reason, a shareholder agreement for a small corporation should absolutely contain provisions about how these disputes will be resolved. Options include requiring mediation, binding arbitration, or procedures for breaking tie votes.

If you are in the process of getting your company off the ground, you might not know where to start when it comes to having a shareholder agreement in place. In every case imaginable, it’s in your best interest to work with an experienced attorney to develop a shareholder agreement that is carefully tailored to the specific needs of your business.

Call Bruntrager & Billings Today to Schedule a Free Consultation with a St. Louis Business Lawyer

If you are considering forming a corporation or already have a company and need guidance in establishing a shareholder agreement, you should speak to an attorney as soon as you can. To schedule an appointment with a business lawyer in St. Louis, call our office today at (314) 646-0066 or send us an email through our online contact form.