When starting a business with other business partners, you might feel confident that you and your partners will always see eye-to-eye and that the business will run smoothly. Unfortunately, sometimes even the best partnerships begin to unravel, and disagreements arise. These disagreements can sometimes snowball into big problems for companies, and in some cases, result in one partner wanting to leave the business. However, there are things businesses can do to prevent corporate conflict and resolve disputes. It’s best to put a plan in action ahead of time, so that way there is a general roadmap for you to follow if or when these circumstances arise. Many times, these roadmaps are drawn out as part of a shareholders agreement. Shareholders agreements and confidentiality agreements help prevent the dissolution of a business due to a breach of fiduciary duty or a partner dispute. In the event of illegal or fraudulent activity implementing HR compliance and using strategic legal counseling adds the necessary safeguards to help catch this activity quickly before it becomes a serious problem. Learn more about the specifics of these preventative strategies here.

Shareholder agreements are not only helpful with providing guidelines on how to address disputes, but are also great tools for preventing them from occurring in the first place. A shareholders agreement is an agreement or arrangement created by the shareholders of a company that outlines how the company should be run, and also identifies the rights, obligations, or duties of the various shareholders as they relate to that company. The ultimate goal of a shareholder’s agreement is to ensure that the shareholders are each treated fairly, to protect the rights of shareholders and to ensure that the actions taken by shareholders are in the best interest of the company. When the limits of a shareholder’s obligations and duties are well defined from the outset, there is no question when fiduciary duties are breached or partners disagree.

Shareholders agreements are not required, but highly recommended. It’s common that disputes arise and a shareholders agreement basically acts like a safety net. If things start to go wrong within the business, having a shareholders agreement can provide clear answers or guidelines for bringing about a resolution.

Yes, a shareholders agreement is a legally binding contract between the parties. For this reason, it is important to consult an experienced business attorney to ensure that the document is valid under the law and fully enforceable.

If there is no shareholders agreement, the risk of the shareholders getting into disputes or infringing on the rights of others is greatly increased. This is because there is no legally binding contract in place that outlines the rights and obligations of the parties or defines aspects of running the business. When disputes arise, the shareholders don’t have a tool to help them find a resolution.

The best way to draft a shareholder’s agreement is with the help of an experienced business attorney. An attorney can not only make sure that the agreement is valid under any applicable state or federal law, but they can also offer suggestions and recommendations for what terms should be in the agreement – including terms that you may not have previously thought of.

There are a few key provisions that should be in every shareholders agreement.

  • The rights and relationship between the shareholders and the management of the company, including clear definitions of the rights and obligations of the shareholders.
  • Provisions about the decision-making process, buying and selling shares, shareholder meetings and voting procedures.
  • A process for resolving disputes, such as engaging in mediation.
  • Terms that protect the company, such as the obligation to disclose information or non-compete clauses.

Buy-sell agreements help define the process of transferring ownership of the company, or a succession plan. A buy-sell agreement should always clearly define who the buyer is and who the seller is and lay out how the buyer is going to fund the acquisition of the business. The buy-sell agreement should also discuss how the buyer and seller are going to handle tax liability, whether a party will invest in insurance policies, or identify specific events that will trigger a buyout. Finally, a buy-sell agreement should include information about the value of the business, or the process by which the parties will have the company valued.

You might think that a buy-sell agreement is only needed when a shareholder is looking to buy or sell shares in the company. However, it’s a good idea to have a buy-sell agreement in place beforehand. That way, if a shareholder unexpectedly leaves the company, or is suddenly unable to continue acting as a shareholder, there is a method in place for reassigning those shares.

When a partner or shareholder wants to leave a business, the remaining partners may or may not have to “buyout” that partner’s share in the business. The shareholder agreement must clarify this obligation. In very broad terms, the buyout process begins by determining the value of the partner’s share in the company. Then, the remaining partners determine how to compensate the leaving partner for that value and evaluate how to divide the leaving partner’s shares. A shareholders agreement is a great way to establish the buyout process and help it go smoothly if or when a buyout is needed.

Calculating a partnership buyout starts with knowing the value of your business. This might be done by reviewing the value of publicly traded shares, or by having a business appraisal completed. Once the company value is determined, the cost of the buyout is equal to the percentage of the partner’s share. So, for example, if the business is worth $1 million, and the leaving partner owns 10% of the company, the buyout would cost $100,000.

HR compliance is one of the best tools for preventing illegal or fraudulent activity in a business. By creating a system of checks and balances within the company, you create a process by which individuals can review the actions of shareholders and independently evaluate if they are contrary to the best interests of the company. In other words, HR compliance acts as a deterrent against illegal activity because the system is designed to specifically identify or find such activity. In the long run, this also helps prevent dissolution of the company because bad acts are identified well before they cause too much damage to the business.

If you are starting a new business or entering into a new partnership, contact a business attorney to help create the necessary agreements and provide strategic counseling on HR compliance. MBM Law has varied and in depth experience with business law and can provide shareholders agreements, confidentiality agreements, buy-sell agreements and HR compliance counseling. Contact MBM Law today to speak with a business attorney.

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