A shareholder agreement is a legal document that creates the contractual terms by which a corporation is governed. Drafting a shareholder agreement for your corporation is a very important step, as it notes how the business functions, as well as how certain business situations and events should be handled in the future. While most template shareholder agreements include many of the same provisions, it is imperative that you discuss with an experienced corporate attorney in Los Angeles to ensure that your shareholder agreement meets the needs of your specific business.
Naming the Shareholders and Governing Procedures
One of the most basic, and important, inclusions within a shareholder agreement is establishing how the board of directors of the corporation will be appointed and elected. Depending on the percentage ownership and other factors negotiated among the shareholders, the board of directors can be chosen in a variety of way. How this process is established will determine how many and which shareholders will have ultimate control of the corporation.
The board governs the business affairs of the corporation and gets to appoint the officers who run the day-to-day operations of the corporation. Accordingly, controlling the board means the ability to control the persons who run the company.
Stock Issuance and Valuation
The shareholder agreement should also identify how many shares of stock each shareholder owns and what rights each class of stock carries. Further, the agreement should also highlight what happens to the stock when someone leaves the corporation. In addition, the agreement should outline the formalized processes that should take place when the company wishes to issue future stock or pay dividends, and how the valuation is achieved. Stock valuation can be based on any of the following: an adjusted book value, a prior agreed to formula, capitalized earnings, or company valuation. Lastly, the agreement should address what has to happen in order for a shareholder to be allowed to sell or transfer his or her shares of stock to a third party.
It is human nature that conflicts arise. In order to be prepared for when it happens, the agreement should identify how conflicts should be handled. Such process may be dependent on the nature of the business, or simply a preference of the corporation, but could include a possible buyout of corporation among the shareholders or a require or arbitration and/or mediation as a required process for a resolution of the dispute.
It is important for shareholder agreements to consider occurrences of life, such as death, disability, or divorce. Although such situations can be difficult to discuss, it is important to have processes in place, as leaving ambiguities will likely prove to be disruptive.
If the time comes for the business to cease all operations, no matter what the reason, the shareholder agreement should highlight the process of winding up the business affairs and covering all corporate debts. This exit strategy should be considered as an essential provision of any shareholder agreement.
Before drafting your shareholder agreement, it is important that you discuss the intricacies and options with a highly reputable corporate attorney in Los Angeles such as the Hakim Law Group. HLG is one of the leading corporate law firms in Los Angeles County. For further information or to schedule an appointment please contact HLG at (424) 299-8913 or visit www.HakimLawGroup.com to learn more.