Shareholder Agreement in Massachusetts
If your Massachusetts business is incorporated and filed with the Secretary of State, a shareholder agreement is an important contract which lays the framework for how decisions affecting the company and shareholders will be made in the future. What is often lost in the initial stages of a starting a new business is the very real fact that arguments about the business operations are likely to arise in the future. In the early days of a new business, usually everyone involved is getting along well because all owners are focused on the building and growth of the business. It can seem that there is no where to go but up in these early days. However, what is often lost in these moments is the potential for disagreements among owners as the business changes.
Similar to discussing a prenuptial agreement with your fiancé before getting married, discussing the problems that might occur in a business before the business is completely operational is a daunting prospect. Discussions over future problems are usually avoided by new business owners because of a fear of creating problems where none exist. But, this moment in time is precisely where an attorney can be useful to all parties involved. Attorney’s are trained in assessing liability, and in reducing and managing the risk inherent in any business endeavor. While it may feel as though discussing the myriad of problems that your shareholder’s might encounter in the future is a bad idea, an attorney can serve as a neutral third party to broach this subject.
The Shareholder Agreement Details
Shareholder Characteristics
Your Shareholder Agreement should limit which members of the organization can become a shareholder, director or officer, and how these individuals can be removed. In addition, the agreement should spell out how members of the board of directors are to be compensated for their service, if at all. Further, you might decide whether you wish your shareholders to serve a certain number of years in the business as consideration for receiving shares after that service is completed. Also, if a shareholder fails to fulfill his or her commitment or agreed upon service requirements you may want there to be a penalty, such as forfeiture of shares held.
Other considerations that might be addressed in the shareholder’s agreement include what action would be taken if a shareholder becomes insolvent (declares bankruptcy) or succumbs to disability or death. The Shareholder Agreement may also detail any limitation placed on shareholders in dealing with a direct competitor of the business. Often Shareholder Agreements will indicate how amendments to the agreement are to be made and by whom they will be made. Absent a specific statement in the Shareholder Agreement as to how amendments will be made, under M.G.L. Chapter 156D, Section 7.32, the Shareholder Agreement can be amended by any shareholder who is a shareholder at the time the amendment is to be made; meaning that without addressing this section, a new shareholder could influence a decision to amend the Shareholder Agreement which may not be desirable to the initial shareholders of the corporation.
Stock Characteristics in the Shareholder Agreement
Your Shareholder Agreement should address the calculation of the value of stock shares. Also, the repurchase of stock and the price of repurchased stock should a shareholder suffer death, disability, or termination ought to be addressed in the Shareholder Agreement.
Should the Business Include a Right of First Refusal in the Shareholder Agreement?
It is often the intention of the initial shareholders in a new Massachusetts corporation to ensure that should any one of these shareholders wish to leave, or is terminated, or suffer disability or death, the shareholders will retain a right to purchase these shares from the departing shareholder. Imagine the potential disaster that might occur where a disgruntled shareholder who has been terminated from the company decides to sell his or her shares to a third party. What if that third party has no knowledge of the business sector in which you operate? What if that third party is also disgruntled, think ex-husband or ex-wife of the departed shareholder? These scenarios could be easily avoided by drafting the Shareholder Agreement to include provisions for the repurchase of shares under a Right of First Refusal clause allowing only the corporation to be able to exercise the initial repurchase of those shares.
How Will Stock be Valuated?
A complex aspect of the Shareholder Agreement is the valuation of stock. Although an easy method does exist to address the matter of stock valuation, namely, choosing a value for the stock and providing in the Shareholder Agreement the ability to alter that amount on either a quarterly, bi-annual, or annual basis. For a more market driven valuation approach it is best to work with an accountant to determine a method of calculating stock value given the occurrence of some event likely to affect the value of the market.
The Tip of the Iceberg
The process of drafting a Shareholder Agreement for your corporation is an exercise in attention to detail. Our firm will work closely with your ownership or executive management to determine which combination of provisions in the Shareholder Agreement best complement your goals and wishes. While many pre-fabricated boilerplate based Shareholder Agreement templates exist online and from other sources, it ought to be clear at this point that reliance on these forms of Shareholder Agreements is a short-sighted approach to drafting a contract of this nature because it is not possible to draft a universal contract when each business is uniquely different. Better to work with an affordable attorney with experience in contract drafting to get the best outcome for your business.
DISCLAIMER:
The information provided in the pages and posts of this website are for general informational purposes only. The information presented on this site is not legal advice, and no attorney-client relationship is formed by the use of this site.
