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Forming a company can be an exciting venture, full of anticipation and optimism. Starting this endeavor, it can be difficult to imagine that anything can go wrong in the future, especially when you form a business with people you trust and respect. Common mistake. Ask any lawyer about inter-company conflict; it happens so regularly it is considered an inevitable fact of life.

With high hopes for success, it remains a smart idea to put a shareholders’ agreement into place at a company’s outset to act as a safeguard in the event of owner disputes, disability, death, bankruptcy or other events.

What is a Shareholder Agreement?

Formation documents, like the Certificate of Incorporation and the Bylaws, set forth basic corporate procedures, mechanics and rights among the shareholders. By contrast, a shareholders’ agreement is a private contract and therefore easier to administer, modify or terminate. This agreement allows shareholders to set forth their rights and obligations to each other and the company in greater depth and detail.

For example, a comprehensive shareholders’ agreement will typically set forth terms and conditions addressing the nature of share ownership. “Buy-Sell” provisions are standard mechanisms regulating the purchase and sale of stock in particular situations, including when a shareholder dies, becomes disabled, divorces, goes bankrupt or undergoes a change in control (if the shareholder is an entity). In these circumstances, shareholders most often utilize a simple right of first refusal to purchase the shares or set forth an unequivocal requirement to purchase the shares.

How Can a Shareholders' Agreement Benefit My Business?

Other common provisions include tag-along rights, which protect minority shareholders by allowing them to “tag along” and participate in a sale of shares by controlling shareholders to an outside buyer, and drag- along rights, which allow controlling shareholders in the midst of a sale to force (or “drag”) minority holders to sell their stock as well. Shareholders may protect against dilution of their ownership with pre-emptive rights provisions, which allow shareholders to purchase their pro rata share of future stock issuances by the company.

Shareholders’ agreements often address a host of other pertinent matters surrounding control and management of a company, including voting requirements and voting agreements, and provide a process for resolving potential shareholder disputes. They may also include confidentiality provisions and specify certain shareholder rights to company information.

Clarity and flexibility form the bedrock of a well-drafted shareholders’ agreement, which will preserve a sense of fairness and order throughout the life of a company and can keep costly litigation at bay.

If you have questions regarding a shareholders’ agreement or you would like to start a business, contact our business attorneys, Letty Laskowski at llaskowski@mccmlaw.com or 585-512-3538, Amy Varel at avarel@mccmlaw.com or 585-512- 3506 or Michael F. McConville at mmcconville@mccmlaw.com or 585-512-3520.

This publication is intended as an information source for clients, prospective clients, and colleagues and constitutes attorney advertising. The content should not be considered legal advice and readers should not act upon information in this publication without individualized professional counsel.

About MCCM

McConville Considine Cooman & Morin, P.C. is a full-service law firm based in Rochester, New York, providing high-quality legal services to businesses and individuals since 1979.  With over a dozen attorneys and a full paralegal support staff, the firm is well-positioned to right-size services tailored to each client. We are large enough to provide expertise in a broad range of practice areas, yet small enough to devote prompt, personal attention to our clients.

We represent a diverse range of clients located throughout New York State and New England.  They include individuals, numerous manufacturing and service industry businesses, local governments, and health care professionals, provider groups, facilities and associations. We also serve as local counsel to out-of-state clients and their attorneys who have litigation pending in Western New York courts.  For more information, please contact us at 585.546.2500.