Shareholder Agreements

Business shareholders in a meeting

Founding a business in Virginia starts with determining which legal form the business will take. If you plan to have more than one owner for the business, you likely need a shareholder agreement between you and the other owners. Or, if you plan to raise capital by selling shares in the business, then you will need to create a shareholder agreement to govern the relationship with those investing in your company.

The day-to-day operation of the business may be up to the board of directors, company officers, or C-level directors, but the shareholders, with a passive ownership interest in the business, also have rights, responsibilities, and obligations. A shareholder agreement outlines the operation of the business, the decision-making process, the fiduciary obligations of the individuals running the company to the shareholders, and the rights and obligations of shareholders in the corporation.

The specific format of the shareholder agreement should work for you and your business. However, it’s a legal contract, and as such, it shouldn’t be something that you rush into without professional advice about its structure. A business lawyer from Surovell, Isaacs, & Levy, PLC, can draft a shareholder agreement or modify an existing one so it works for your obligations and business goals.

What Is a Shareholder Agreement?

Shareholder agreements outline the specific terms of shareholder ownership. It defines what a shareholder is, outlines their rights, and specifies how fair pricing of company shares will occur. The agreement may outline the procedures for shareholder voting and place restrictions on shareholder activities.

The Code of Virginia sets forth the legal requirements for shareholder agreements in the Commonwealth. Its statutes cover the obligations of shareholders and business owners and how a shareholder agreement should be structured. The Virginia Stock Corporation Act provides further legal guidelines for forming shareholder agreements. It defines a shareholder agreement as one that governs the relationship among shareholders of the exercise of corporate power or management of business. A shareholder agreement may be necessary even if you have a family-owned business, as it outlines the obligations and responsibilities of each owner.

Purpose of Shareholder Agreements

A shareholder agreement may serve many purposes:

  • Minimize disputes. Disagreements can be costly, and if shareholders can’t compromise when disagreements arise, the disputes may not be settled without costly litigation. A well-executed, detailed shareholder agreement provides avenues for dispute resolution or contingencies if certain conflicts arise. If disagreements are serious enough, it could cause the business to fold entirely.
  • Assign decision-making authority. Often, major decisions for the direction or growth of a company are made by its board of directors. However, many shareholders may want a say in how the company is run, as it’s their investment at stake. A shareholder agreement can indicate which decisions must have a shareholder agreement and which may be made by the Board without shareholder input.
  • Establish how shares should be transferred. Some business founders may want a right of first refusal if a shareholder wishes to sell or transfer shares. Or the current shareholders may want a right of first refusal if one of their fellows wishes to transfer shares. The right of first refusal may be an attractive benefit for business owners who wish to limit ownership.
  • Set protections for minority shareholders. A majority shareholder in a company is one who owns more than 50% of the company shares. However, the company may have one or more minority shareholders, and those shareholders may want the agreement to include protections for their interests. A majority shareholder may pressure or threaten minority shareholders to ensure they vote a certain way or limit how they sell or transfer shares. Common protections for minority shareholders include permitting minority shareholders to sell shares if the majority shareholder does.
  • Protect proprietary information. Shareholders may be privy to trade secrets, client lists, or other intellectual property. The shareholder agreement may include non-disclosure agreements, non-compete agreements, or other protections limiting the company’s exposure if a shareholder sells shares and shares company information with a competitor.

What Should My Virginia Shareholder Agreement Include?

To ensure that your agreement protects shareholders while maintaining your ability to make business decisions and grow your company, you should have professional legal advice and an experienced business attorney draw up your shareholder agreement.

Essential elements of a shareholder agreement include:

  • Shareholder rights. The obligations and rights of minority and majority shareholders should be specified, including dividend eligibility, voting rights, and restrictions on transferring shares. Non-compete restrictions, NDAs, and required capital contribution schedules may also be included.
  • Share transfer restrictions. This may include the right of first refusal or limitations on transferring shares to non-stakeholders.
  • Decision-making authority. Shareholders understand when they may and may not participate in the company’s decisions. This may also include whether certain decisions should be unanimous or when a majority consent is permitted.
  • Arbitration, mediation, or dispute resolution protocol. The agreement should outline the dispute resolution process, requiring all parties to attend binding arbitration and requiring disagreeing parties to follow these procedures before initiating litigation.
  • Transition and exit strategies. If a shareholder decides to leave the business or relinquish their interest in the business, the agreement can outline how to make a smooth transition of their interest to another. This may include a buy-sell arrangement or a business succession plan.
  • Confidentiality protections. This outlines which information is considered protected intellectual property and may not be disclosed, even after shareholders relinquish their interest in the company. It may include a non-compete clause or a period of time that the non-compete clause is in effect.

Experienced Virginia Business Attorneys

Do you need help creating a shareholder agreement for your business? Ideally, this is done before opening its doors, but if you didn’t implement a shareholder agreement at the outset, there’s still time. We can help. The business attorneys at Surovell, Isaacs, & Levy, PLC can draft a shareholder agreement appropriate for your business and goals, including provisions to allow your business to grow. We can also help you amend or alter an existing shareholder agreement so it’s more aligned with your growth trajectory. Contact us today to learn more.