As prudent couples who are tying the knot are increasingly viewing a prenuptial agreement as an essential component of their preparations, individuals entering into a corporate “marriage” are also well-advised to prepare a shareholder agreement to protect their interests. A qualified business valuer can help those entering into a business venture by navigating this important step in establishing a new business.
A shareholder agreement is the foundation upon which the structure of rights and obligations of a corporation’s shareholders is established. This document should be distinguished from a corporation’s bylaws, which explain the rules and regulations for operating a corporation. Shareholder agreements are relevant for all businesses, even for those with only two shareholders (who may initially be “best friends”) and for start-ups.
A well-designed shareholder agreement includes information on which shareholders will be involved in running a company (as officers, directors, etc.), how events such as termination, bankruptcy, disability or death of shareholders will be accommodated, the manner in which share transfers will be conducted, non-competition and confidentiality provisions, rights of access to corporate information, dividend issuance policies, and dispute resolution mechanisms.
In particular, buy-sell provisions are a key element of shareholder agreements, as these govern the rights and restrictions on transfers of shares. Some key aspects of buy-sell provisions include:
- Tag-along rights (minority shareholder right to join in a sale transaction at the same terms and conditions as a majority shareholder);
- Drag-along rights (majority shareholder right to compel a minority shareholder to join in the sale of a company at the same terms and conditions);
- Terms of issuance of shares to new shareholders;
- Rights of first refusal (shares sold to third parties must first be offered at the same terms to existing shareholders); and
- Capital call provisions and pre-emptive rights (shareholders are protected against dilution of their ownership interests).
One of the most important aspects of a shareholder agreement pertains to the valuation of the company’s shares. Hiring a qualified business valuer is imperative when the shareholder agreement is initially drafted and/or when a transfer of shares occurs. Aside from the determination of fair market value of the shares being transacted/issued, a business valuer should be consulted when including any explicit provisions in the shareholder agreement with respect to a valuation formula (or lack thereof) or application of discounts for lack of control and/or lack of marketability of shareholdings.
Ultimately, the use of experienced legal and valuation professionals to prepare a shareholder agreement for your business will greatly offset the cost involved by providing certainty to shareholders and protecting against damaging shareholder lawsuits down the road. In the words of Robert Frost, “Good fences make good neighbors.”
To learn more about business valuation or to find a qualified business valuer, visit The Appraisal Foundation at this link.