Shareholders meeting

The Importance of Shareholder Agreements for Corporations

Law Offices of Peter V Lathouris LLC  May 23, 2024

When forming a corporation, you may be unsure how to face the amount of documentation you need to prepare to set your business in motion. These documents may include corporate bylaws, articles of incorporation, and shareholder agreements. The latter tend to be some of the most misunderstood documents in forming a corporation as many business owners do not realize why these agreements matter and what role they can play.  

If you are in the process of forming a corporation or in the early stages of starting your business, contact our business law attorney at the Law Offices of Peter V Lathouris LLC. With over three decades of legal experience, we can guide you through various legal matters that will inevitably come up when lifting your business off the ground.  

With an office in Stamford, Connecticut, we serve clients throughout Fairfield County and New Haven County. Our attorney can assist you with creating your funding documents, which include a shareholder agreement, to set your business up for continued success. 

What Is a Shareholder Agreement?

Shareholder agreements are the backbone of any successful corporation. These documents detail the overall relationship of a company and its shareholders.

When drafted properly, a shareholder agreement can complement the corporation’s other documents, including bylaws and articles of incorporation to ensure a smooth business operation.  

When starting a business that involves more than one person investing money in the venture, a shareholder agreement can lay a solid foundation on which to build your corporation. 

What Can Be Included in a Shareholder Agreement?

Knowing that you need a shareholder agreement for your corporation is one thing. But knowing which terms and provisions the contract should contain is a whole different story.

Typically, shareholder agreements include:  

  • A framework for the corporation’s administration. This framework includes detailing the rights and obligations of shareholders, the management structure of the corporation, and the decision-making processes that will be followed by the individuals who invest their money in return for shares. By setting these guidelines, corporations can prevent misunderstandings and ensure that the administration of the company remains consistent regardless of changes in leadership or ownership. 

  • Resolution mechanisms for conflicts between shareholders. Conflict is, unfortunately, an unavoidable aspect of any business venture, especially as more stakeholders become involved. Shareholder agreements can preemptively address potential disputes by containing provisions for conflict resolution. These might include mediation or arbitration clauses that offer a clear path to resolving disputes without resorting to costly and time-consuming litigation.  

  • Provisions that protect the interests of minority shareholders. In any corporation, there is always a risk of major shareholders overpowering the interests of the minority. Shareholder agreements can serve as a protective measure, ensuring that the rights of minority shareholders are respected. This might include stipulations on how decisions are made, ensuring that all shareholders have a voice, and setting conditions that prevent major shareholders from making unilateral decisions that could negatively impact the company or its minority stakeholders. 

  • Regulation of the transfer of shares. Shareholder agreements typically include clauses that regulate how and when shares can be transferred. These might include preemptive rights, which give existing shareholders the right to purchase newly issued stock before it is offered to others, or drag-along and tag-along rights that protect minority shareholders in the event of a buyout. These provisions help maintain stability within the shareholder base and can prevent external parties from gaining undue influence over the corporation. 

  • Different exit strategies. Shareholder agreements can outline agreed-upon exit strategies for shareholders who wish to leave the corporation. This can include buy-sell agreements, which determine how a departing shareholder's shares will be valued and who can purchase them. Having these strategies in place from the outset can prevent conflicts and ensure that transitions happen smoothly, without negatively impacting the ongoing operations of the corporation. 

Generally, what to include in a shareholder agreement depends on the nature of your business and its needs. If you are considering creating a shareholder agreement for your corporation but aren’t sure how to get started, contact us at Law Offices of Peter V Lathouris LLC.  

Reasons to Create a Shareholder Agreement if You Own a Corporation

While there is no legal requirement for corporations to have shareholder agreements, there are numerous reasons why you should consider drafting one.

Some of the most compelling reasons include:  

  1. Risk mitigation. Life is unpredictable, and so is business. Shareholder agreements come into play as a protective measure against potential disputes and misunderstandings. Whether it's a disagreement on dividend policies or the departure of a key shareholder, having predefined resolutions in your agreement can save time, money, and relationships. 

  1. Protection of interests. Not all shareholders are created equal, and neither are their investments. Minority shareholders, without a shareholder agreement, may find themselves at the mercy of majority decisions. A carefully tailored agreement ensures that the rights and interests of all shareholders, regardless of their stake size, are protected.  

  1. Long-term planning. A corporation without a vision for the future is like a ship without a rudder. A shareholder agreement can serve as a compass, guiding your corporation through succession planning and potential conflicts. It allows shareholders to understand the long-term goals of the corporation and provides a roadmap for achieving them. 

  1. Clarity and consistency. Misunderstandings can be the downfall of any relationship, including business partnerships. A shareholder agreement provides a clear, written record of how decisions are made, who makes them, and how various scenarios will be handled. This clarity fosters a more harmonious working environment and helps avoid disputes. 

  1. Investor confidence. Investors seek stability and predictability. A well-drafted shareholder agreement signals that your corporation is committed to transparency and has mechanisms in place to handle internal issues efficiently should they arise. This can make your corporation a more attractive investment opportunity in the eyes of potential investors.  

  1. Flexibility and confidentiality. Unlike corporate bylaws or articles of incorporation, which may need to be filed with a government body, shareholder agreements offer flexibility and privacy. They can be tailored to fit the unique needs of your corporation and its shareholders without public disclosure, allowing you to address any sensitive matters discreetly. 

Every business is unique, which is why what may be beneficial for one company may mean nothing for another company. But a great thing about shareholder agreements is that you can customize them to suit your specific needs, goals, and preferences.  

Get Assistance in Creating Your
Shareholder Agreement

At the Law Offices of Peter V Lathouris LLC, we provide a full range of legal services to those forming a corporation or other business entities.

Our business law attorney can help you draft a shareholder agreement that reflects your vision for your company and is tailored to the unique needs of your business. Contact our office to get started today. We offer complimentary 30-minute consultations.