20 Apr Why Are Corporation Governing Documents Important? Part 2 – Shareholder’s Agreement (or Buy-Sell Agreement)
By: Barry E. Haimo, Esq.
April 20, 2017
Why Are Corporation Governing Documents Important?
Part 2 – Shareholder’s Agreement (or Buy-Sell Agreement)
In a recent blog post, we explained the importance of corporation governing documents outside of what Florida requires. While Florida’s required documents are important, they do not cover the specific goals and terms of a corporation. Management and board members need bylaws to keep the corporation running according to the founder’s intent.
The work isn’t done with just bylaws, though. One of the additional corporation governing documents that should be written includes the Shareholder’s Agreement (often called the Buy-Sell Agreement).
What Is the Shareholder’s Agreement?
The shareholder’s agreement and the buy-sell agreement are often interchangeable terms that refer to the same document. It is a document that lays out the responsibility of shareholders (individuals who own shares in the company) and their relationship to the corporation.
As soon as possible, shareholders with a majority of shares in the company should begin to draft and discuss the provisions in this document. The document should also be reviewed by all shareholders before it is signed and made an official document of your company.
What Is in the Shareholder’s Agreement?
Items in the shareholder’s agreement will vary depending on the size and goals of the corporation, but usually include:
- How to calculate the value of shares when they are sold
- How to regulate a shareholder’s relationship to the corporation
- Management of the corporation
- Ownership of the corporation’s shares
- Privileges of shareholders
- Protections of shareholders
- What happens after a shareholder leaves a corporation under different circumstances
- Who can or cannot buy shares after a shareholder exits the corporation
- Timing of buying shares after a shareholder’s exit
- Insurance terms for shares
- Structure of liquidity
Now, obviously this is a lot to consider, and it’s possible that not all of these provisions will be necessary for the structure and resources available within your corporation. But make sure you don’t put writing this document off because a lot of these items don’t seem to matter “right now.” Even if it’s not on your immediate to-do-list, it should still be a priority before your corporation gets going.
Take Time to Draft a Shareholder’s Agreement – You’ll Be Thankful You Did Later
When a corporation is first formed, your team is solid and ready to invest in your new venture. But this won’t be the case forever. Shares will eventually change hands, and shareholders will have to exit their agreement.
Let’s look at two different situations. One is the exit of a shareholder through termination. The other is the exit of a shareholder due to their sudden death.
Would the shares of both shareholders be treated the same? That is fine, as long as the rest of your shareholders agree and are confident in their position in the company. Shareholder’s agreements are a great way to prepare for any management or shareholder changes that happen throughout the life of the corporation.
Preparation Doesn’t Stop at Corporation Governing Documents
Even if you think your corporation is ready to launch, there are probably a few more tasks left on your to-do list. Check in with a Florida business planning attorney to ensure that your corporation has the documents and plans in place for smooth transitions, and the answers you need when any situation arises with your shareholders.
Barry E. Haimo, Esq.