Too often, shareholder agreements, employment agreements, bylaws, and other corporate documents sit in a drawer where they are not periodically reviewed and adjusted for changes in circumstances. In some cases, such agreements do not even exist or they were ill-conceived or documented and do not provide for adequate protection for the company or its owners.
Effectively drafted shareholder agreements protect both the shareholder and ultimately the company as it provides for a smooth transition in the wake of a triggering event. In the event of the untimely death or disability of a shareholder, do you want their spouse or children to be your partner? Do you care to whom your partner sells stock? When and for how much can shares be redeemed? You’d better make sure you have language in your agreements that will accomplish your desires. Times change; make sure your agreements are relevant to today’s landscape.
Privately-held businesses often fail to acknowledge the differences between a shareholder’s role as an owner and as an employee. There is a big difference—shareholders have an investment in an asset and, as such, get to reap the benefits of that investment. There are no guarantees of employment, compensation, or job activities. A shareholder’s involvement as an employee, however, should be governed by an employment agreement. The agreement should include such things as compensation terms, length of employment, and responsibilities. Do your shareholders have a right to be employed for or receive benefits life? Make sure your employment agreements properly reflect your desired terms.
While you are reviewing the shareholder and employment agreements, take some time to also familiarize yourself with the company’s bylaws. So often they are outdated or contain terms with which owners are unfamiliar. For instance, the bylaws might provide for quarterly Board meetings for a minimum of three directors. Unfortunately, you may never have known this and have been operating with less than three directors and no formal board meetings to ratify corporate resolutions.
We have seen too many businesses fail or become severely distracted because of weak or absent corporate documents. Please take some time to review your company’s agreements.
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