Austin TX Business Law Blog

Tuesday, September 12, 2023

The Role of a Shareholder Agreement in Your Business

A shareholder agreement is a foundational legal document for a business. Established between company shareholders, this agreement details the rights and responsibilities of the shareholders as well as detailing how the company will be set up and run. While taking the time to go through and set all of the terms of a shareholder agreement may seem cumbersome, especially when time is money, doing the work on the front end of things can be a cost-effective way of reducing the chances of expensive and time-consuming issues arising in the future.

What Is the Purpose of a Shareholder Agreement?

The shareholder agreement contains terms that will help ensure shareholders and other integral players in your company are on the same page. While such agreements can have a variety of terms and vary in degrees of specificity, the terms that are involved go to the heart of how a company operates as well as how shareholder issues are addressed and, hopefully, prevented.

To get a better understanding of the role of a shareholder agreement in your business, it can be most instructive to go through some of the terms that many opt to include in their company’s shareholder agreements. Shareholder agreement terms can include:

  • Decision-making authority: Shareholders play a central role in making vital business decisions. What authority does each shareholder have to cast a vote? What percentage of votes is necessary to pass a business motion? Should different types of votes require different percentages of votes to pass? It may be a good idea for some decisions, such as those involving business financing and structure, to require a greater voting percentage, or even a unanimous voting approval, to pass.
  • Restriction on share ownership and transfers: Do you want to restrict who can hold shares in the business? You can place restrictions on who can own shares as well as how and under what circumstances shares can be transferred. The more detailed you are in this section, the better. Think of circumstances such as when a shareholder passes away. What will happen to those shares? Do you want to include a compulsory buy-out provision in the agreement that mandates that the remaining shareholders or the business is required to buy the shares of the deceased?
  • Shareholder financing: Do you want shareholders to be required to contribute a certain amount of funds that fall in line with their level of interest in the business? You should also detail how the corporation will access funds.
  • Exit strategies: Over the course of time, a business may have run its course. Shareholders may wish to come and go. To help preserve the value of the business and also to help business dealings wrap up without further incident, detailing the different exit strategies available to shareholders can go a long way to help prevent issues when the need for such exits arises.

Business Law Attorney

Need assistance drafting a solid shareholder agreement for your business? The Kumar Law Firm is here to help. Contact us today.

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