What is in your shareholder agreement?
Want to sell or recapitalize your company? Time to review your company shareholder agreement. Owners might be surprised some of the things they are allowed or not allowed to do. A shareholder agreement can get complicated quickly once you have over 20 shareholders because the shareholder agreement is typically used to define what happens in all subsequent transaction in a given company’s shares. There are many items in the agreement and sometimes these items might even have major conflicts with each other.
There are typically two types of shareholder agreement, unanimous and ordinary. An unanimous shareholder agreement gives responsibility to the shareholders and usually has restrictions on what the director can or cannot do. On the other hand, an ordinary shareholder agreement gives the description of relationships of the shareholders’ powers and roles as owners of the company, rather than restricting directors’ ability to manage the company.
Beside an Exit, business owners should review the shareholder agreement on any triggering event such as the death of a shareholder, insolvency or bankruptcy of a shareholder, or change of the method use in calculating the company’s tangible or intangible assets.
The shareholder agreement should also have clear instructions for share sale including simple buy-sell provisions and right of first refusal or first offer where shareholders have the right to buy when the other shareholder decide to liquidate. To ensure fairness, there are provisions for majority and minority parties of a company as well. But the often missed item is the value and payment terms and how they might change given the triggering events. Shareholder agreement can also determine alternative ways to derive company value.
Speak to your business attorney and capital advisor to understand what you need to know about your shareholder agreement and the definition of value. When in doubt, make sure you speak to a chartered financial professional for your need.