Officers and directors manage corporations, but shareholders are the actual owners. A thorough, enforceable shareholder agreement is necessary for the smooth operation of Virginia corporations. Knowing what to include in a shareholder agreement can help prevent potential conflicts and misunderstandings among shareholders by clearly defining everyone’s rights and responsibilities from the outset.
What Is a Shareholder Agreement?
Shareholder agreements provide the framework for your business’s operations, from defining shareholder capital contributions to including an effective dispute resolution mechanism. However, shareholders typically do not actively participate in the company’s day-to-day operations.
A shareholder agreement is required when legally establishing a corporation in Virginia. Whether you have just a few shareholders or many, the agreement is necessary because it defines who the shareholders are, sets forth a method for valuing the shares, and restricts shareholder activities, among other things.
What Must Be Included in a Shareholder Agreement?
When drafting a shareholder agreement, several key elements must be included to prevent shareholder disputes. These elements will help ensure the agreement complies with Virginia law and is enforceable in court. It’s crucial to work with an attorney, who can guide you through the process and help you draft an agreement that includes all necessary elements.
The Role and Responsibilities of Shareholders
The shareholder agreement should outline its intentions and purposes and clearly list all shareholders and their respective ownership stakes in the corporation. It should also specify any restrictions regarding the transfer of shares, including rights of first refusal or buy-sell provisions. The agreement should include a method for valuing shares, which can be crucial during buyouts or transfers.
The agreement should define shareholders’ roles and responsibilities regarding corporation management, including any specific limitations on powers. It should also include a provision establishing a process for resolving disputes among shareholders, such as mediation or arbitration procedures. Each shareholder’s voting rights should be explained, especially regarding governance and significant decisions such as major investments, mergers, or changes in company structure. Finally, it should clearly explain how company profits will be distributed among shareholders, including dividends and reinvestment policies.
Exit Strategy for Shareholders
The agreement should detail the procedures for shareholders wishing to exit the business, including buyout terms and conditions. Similarly, it should include steps for handling ownership transfers in case of a shareholder’s death or disability. A succession plan can facilitate a smooth transfer of ownership so that the company can continue operating smoothly.
How to Modify a Shareholder Agreement in Virginia
When modifying a shareholder agreement, working with an attorney can help ensure the modifications adhere to the existing agreement’s terms and comply with state law. Typically, changes can be made to a shareholder agreement as long as all shareholders agree to the modifications. Modifications should be documented in writing for transparency and enforceability. Some of the most common reasons for modifying shareholder agreements include the following circumstances:
- Changes to the shareholder ownership terms
- Disputes between shareholders
- Changes in the company’s business strategy
- Changes in light of a founder leaving the company
- Succession planning
- Pursuing external investment in the company
- Altering shareholder rights related to voting power or income
Contact a Shareholder Agreement Lawyer in Fairfax, Virginia
At Surovell, Isaacs, & Levy, PLC, our full-service law firm regularly drafts shareholder agreements for Virginia companies. Our legal team can guide you through the process, ensuring all necessary elements are included, and the agreement complies with Virginia law. We represent individuals and businesses in Northern Virginia and provide tailored, strategic legal counsel. Contact Surovell, Isaacs, & Levy, PLC to schedule an initial consultation.
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