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The Importance of Shareholder Agreements for Corporations

On Behalf of | Nov 17, 2021 | Firm News

Many people starting out in business will opt for a corporate structure to lessen personal liability, but if the corporation has more than one shareholder it generally is deemed to be a closely held corporation until it registers as a publicly traded corporation, if ever.

A closely held corporation, typically between a handful of business associates, friends, or family, is much like a partnership, where if one person decides to retire, to opt-out for personal reasons, gets divorced, dies, or ends up in bankruptcy, the other partners – in this case, the shareholders – can only watch as things potentially unravel. Unless…

Why You Need a Shareholder Agreement

California, like every other state, requires articles of incorporation to be filed when forming a corporation, but in the case of a closely held corporation with more than one shareholder, a shareholder agreement should be adopted to address those issues listed above.

Otherwise, under California law, suddenly the spouse of a divorced shareholder is now part of your corporate structure or a creditor may have claims to your assets.

The Law Offices of Jerry J Goldstein has a long history of assisting California entrepreneurs successfully form and operate new businesses. We can help you draft a legally bullet-proof shareholder agreement to protect your new closely held corporation and its shareholders.

We serve clients throughout the Coachella Valley, including Palm Desert, California, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties, among others.

What Is a Shareholder Agreement?

Much like a partnership agreement, a shareholder agreement sets forth the rights and obligations of the shareholders, and procedures for dealing with shareholder relationships in a closely held corporation. A shareholder agreement will address the rights and obligations of each shareholder, how the shares of the corporation can be sold, how the company will be managed, and how decisions will be made.

A shareholder agreement also commonly provides so-called “buy-sell” provisions in that it also deals with issues concerning shareholders who desire to sell their shares, shareholders that other shareholders prefer to buy out, or shareholders whose personal circumstances force other shareholders to take action (e.g., divorce, bankruptcy, death, etc.).

Why a Shareholder Agreement Is Essential

If there is shareholder agreement in place, costly litigation can ensue when there is a shareholder dispute or complication, which could doom the fledgling enterprise or make matters so intractable that the other shareholders may throw in the proverbial towel.

Examine the case of a shareholder who suddenly dies. Without a shareholder agreement, California law will prevail and award that deceased person’s shares to beneficiaries named in a will or trust, or absent those documents, to family members as determined by family intestacy laws in probate administration.

The remaining shareholders may suddenly find themselves dealing with a spouse, children, or friends of the deceased, who may have no knowledge of or interest in the enterprise. A shareholder agreement can avoid that possibility with a provision to purchase the shares of from the deceased’s estate, either in a lump sum or over time.

What if a shareholder becomes disabled and unable to participate in the company? A shareholder agreement can address this issue by defining disability and enacting provisions to compensate the disabled shareholder and purchase his or her shares.

Divorce is another dicey proposition for shareholders in a close corporation. If one shareholder gets divorced, absent provisions in a shareholder agreement, a disgruntled spouse may acquire 50 percent of their divorced spouse’s shares, or worse, acquire100 percent of such shares. The shareholder agreement can require the divorced spouse to sell his or her acquired shares to the corporation (or the other shareholders) at a price or formula set forth in the agreement.

A well-crafted shareholder agreement will also establish valuation standards and buyback provisions if a shareholder simply desires to sell their shares, and will typically also include provisions for the right of first refusal by the Corporation or the other shareholders if a shareholder decides to sell his or her shares to an outside party or company.

Business Law Experience You Can Rely On

As you can see, without a shareholder agreement, a closely held corporation can quickly unravel with the actions or misfortunes of one shareholder. These events can all be anticipated and provided for in a comprehensive shareholder agreement.

The Law Offices of Jerry J Goldstein have helped countless others establish successful businesses. We can help you too by constructing a shareholder agreement to protect your interests and preserve the viability of the company you’re forming.

We serve clients throughout the Coachella Valley, including Palm Desert, California, where we are located, as well as communities in and around Imperial, Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties.

Please note that in providing services outside of our immediate area, we generally don’t bill for travel time from our offices to meet at the business location or home of our clients.