What Are the Key Elements of a Shareholder Agreement?

Business law attorney sitting with client

If you are starting a business in Virginia, a knowledgeable business law attorney can help you determine what type of entity you need and how to set it up. If you establish a corporation with more than one shareholder, you will need a shareholder agreement to define their rights and responsibilities. These rights and obligations may be unique to your business. At Surovell Isaacs & Levy PLC, our experienced business law attorneys will tailor your shareholder agreement to best serve you and your shareholders.   

What Is a Shareholder Agreement?

A shareholder agreement is essential to successfully establishing a corporation in Virginia. Whether you have many investors or just a few, the shareholder agreement will outline certain terms to help the business run smoothly. It defines who the shareholders are and sets forth a method for valuing the shares, restrictions on shareholder activities, and voting, among other items. As those who hold shares in the company typically do not have an active role in the day-to-day operations, a shareholder agreement is crucial from the start.   

The Virginia Stock Corporation Act describes a shareholder agreement as governing “the exercise of corporate powers or the management of the business and affairs of the corporation or the relationship among shareholders.” You should use a shareholder agreement regardless of your relationship with your investors. In fact, if your shareholders are family members or friends, a shareholder agreement can become even more critical when disputes arise. It can provide a valuable roadmap to a resolution to prevent jeopardizing the relationship.  

Elements to Include in a Shareholder Agreement

Shareholder agreements provide the necessary framework for how your business will run – from defining shareholder capital contributions to including an effective dispute resolution mechanism. Because these agreements play a vital role in governing the rights and responsibilities of shareholders in a corporation, it is crucial to retain a knowledgeable lawyer with both legal prowess and good business sense to help you compose an effective agreement.  

Some of the essential elements of a shareholder agreement include:  

  • Shareholder rights – The rights and responsibilities of each shareholder will be set out in the agreement, including voting rights, eligibility for dividends, and any transfer restrictions. Shareholder obligations, such as required capital contributions or non-compete clauses, will also be included. 
  • Confidentiality – Protecting proprietary or otherwise sensitive corporate information is paramount to running a successful business. For this reason, shareholder agreements typically include confidentiality provisions and non-compete clauses. Such clauses prohibit shareholders from competing with the corporation through another business venture while a shareholder of your company and for a defined period after their departure. Non-disclosure clauses are also a standard provision in a shareholder agreement.  
  • Decision-making procedures – Your shareholder agreement should include processes and procedures for reaching decisions in the corporation. By establishing such processes at the outset, your shareholders will understand the expectations regarding whether majority or unanimous consent is required and know what guidelines to follow concerning the appointment of directors, shareholder voting, and conducting meetings.
  • Share transfers – The shareholder agreement will typically restrict transfers to non-shareholders. The purpose of such restrictions is to allow current shareholders to exercise their rights of first refusal before shares are otherwise transferred. 
  • Dispute resolution – A key component of any shareholder agreement is addressing inevitable conflicts before they arise and providing a mechanism for resolving them. The agreement will likely include a mediation or arbitration requirement before shareholders can litigate any issue. The purpose of the dispute resolution clauses is to facilitate a fair and reasonable resolution before the situation escalates.  
  • Exit strategies – You can provide a mechanism for smooth transitions when a shareholder decides to leave the business by including dissolution terms and exit strategies, including buy-sell arrangements, in your shareholder agreement.

Consult with a Knowledgeable VA Business Law Attorney

At Surovell Isaacs & Levy PLC, we will assist you in developing a robust shareholder agreement for your corporation. We will advise you on what provisions would most benefit your company and craft a comprehensive agreement to protect your business and shareholders. Our goal is to create the solutions you need. Call us today to learn how we can help in all aspects of your business formation needs.  

Posted in: Business Law