What Should Go in Our Shareholder or Operating Agreement?
Shareholder agreements and operating agreements are not one-size-fits-all. In fact, they can be as diverse and varied as the different owners or groups that use them. A sure-fire way to make sure you have a poor shareholders agreement is to simply download an on-line template, sign it, include it in your governance documents, and deploy it as is.
In fact, shareholder agreements and operating agreements should be carefully drafted and customized by your business attorney in consultation with the stakeholders to ensure they are appropriate for your business. The unique, and often conflicting, concerns and priorities of business owners must be addressed in your agreement to protect owners and officers of your business venture.
Important things to include in your Shareholder or Operating Agreement
Some basic things that your shareholder or operating agreement should include:
- Directors, officers and managers: One of the first things a shareholder or operating agreement needs to include is how a directors, officers or other managers will be appointed, who that will be, and numbers, titles and authorities delegated to those directors, officers and managers. Additionally, those agreements would also include provisions for how to remove a director or officer, although generally, issues not specifically addressed will be governed by applicable law.
- Initial Contributions: Another area you will want to cover is what sort of initial investments/advances/loans will be required of the initial shareholders or other owners. In other words, how will the business be initially capitalized and potentially, how will future equity needs, of the company be funded.?
- Share Valuation: In the event of a death or default of an owner, how will ownership be determined and how will the rights (or limitations on rights) of a defaulting owner or the estate representatives of a deceased owner be determined? In a closely held company how will the rights, if any, of a divorced owner’s ex-spouse be determined? Will the ex-spouse have any rights? Business divorces can be just as messy as domestic divorces. Will a divorced or surviving spouse have voting rights? Do the remaining owners want to have a forced relationship with an individual that has not been a part of the business?
- Restricted Actions: Are there any actions that shareholders or other owners will be restricted from doing? This can include engaging in competitive business opportunities, viewing confidential information/trade secrets, etc.
- Equal vs. Unequal Contributions: The shareholder or operating agreement should outline whether each shareholder is expected to contribute their full-time business efforts to the company and what will happen to their compensation or return of capital if their contributions are disproportionate to other shareholders.
- Signing Authority: The shareholder or operating agreement should carefully outline who has authority to sign different types of business documents and contracts. Additionally, it should stipulate anything that needs to be approved or executed by more than one officer.
- The Right of First Refusal, Right of First Negotiation: Your agreement must also cover procedures to follow in the event a shareholder or other owner wants to liquidate their ownership in the company. This includes deciding if they will be required to give other shareholders the right of first refusal or right of first negotiation before selling to a third party.
- Quorum: Your agreement must also stipulate what constitutes a quorum for owner and director meetings to transact business.
- Important Decisions: It’s also a good idea to agree, up front, which business decisions will require unanimous consent, and which will require simply a majority or super majority vote.
- Profit Distribution and Return od Capital: The distribution of profits and return of capital of shareholders is something that is subject to negotiation and included in the shareholder or operating agreement. Are any of the stakeholders entitled to priority returns?
A shareholder or operating agreement is only as good as it is customized for your specific needs. The best thing you can do is sit down with a qualified, experienced business attorney and draft a shareholder agreement that will cover these areas of concern (and more). IF you have any questions about shareholder agreements or wish to discuss other related legal issues, call Stephen Rizzieri at 214.434.1017 or fill out the form on our law firm site today.