Before signing a shareholders’ agreement, get a lawyer’s help

Imagine for a moment that you are a shareholder in a closely held corporation here in California. In order to have a say-so in the circumstances under which you and the other shareholders may transfer your shares (or be required to sell your shares to the corporation or other existing shareholders), a shareholders’ agreement needs to be in place. If you are like a lot of our California readers, you may have only a working knowledge of business law and may be only vaguely familiar with shareholders’ agreements. Unfortunately, this leaves you at a disadvantage because if presented with a shareholders’ agreement, you might not understand all the implications of what you are signing, which could lead to disputes down the road. 

Shareholders’ agreements are like any contract here in California, meaning they outline what each party can and cannot do while the contract is in effect. The main purpose of a shareholder agreement is to protect the shareholder from actions taken by other shareholders. That is, it restricts a shareholder’s ability to transfer shares to third parties outside the original shareholder or group. It also provides a ready market for the shares on a shareholder’s death and various other lifetime events. For corporations, agreements may include provisions that protect the business interests or make sure that shareholders do not dilute the company’s ownership.

Like any good contract, a shareholders’ agreement should have both the company and the shareholders’ best interests in mind. But without the right legal help, drafting and signing such a document could be fraught with risk. It could also lead to contentious shareholder disputes that typically require further intervention from a skilled attorney and perhaps even litigation.

To avoid this potential issue, if you’re a shareholder, it is a good idea to talk to a lawyer well versed in business law before signing an agreement, to make sure that you understand your rights and what you’re agreeing to. For businesses, having a lawyer look over a shareholders’ agreement to make sure ownership rights are protected as well is also a good idea.