What are Shareholders' Agreements?

Throughout New York, NY, there are businesses of all sizes. Many of those begin as partnerships, as people with skills, plans and resources combine what they have to offer in the hope of securing greater success together than they would have alone. Many of those partnerships work out well.

Others, however, do not. If there isn't a plan in place to deal with ending the partnership, contentious and expensive commercial litigation may follow, damaging the business. For that reason, it is a good idea to have a shareholders' agreement in place.

What does a Shareholders' Agreement do?

One of the most useful things that it does is outline, with no ambiguity, the responsibilities, duties and expectations of each partner in the company. By having that information in print in a legal document, the partners know who is to do what within the company, precluding disagreements and making sure that each partner lives up to their obligations.

What about benefits?

Shareholders' Agreements also address benefits. Shareholders' Agreements can delineate who gets what when the company is prospering, which prevents the partners from getting into arguments about pay, including profit-sharing, and other material benefits from the company's success.

What about if a partner divorces?

Shareholders' Agreements can establish that in case a partner divorces, a partner cannot transfer shares to their former spuse. The contract can require that the divorcing party must sell their shares or the percentage of shares that the spouse  wants to the other partners at a price established by amount or by formula in the Shareholders' Agreement.

Does that apply if a partner dies?

A Shareholders' Agreement can also establish rights if a partner dies so that the  shares of the deceased party will be sold to the other partners, with the proceeds thereof payable to the deceased partner's estate.  The core point is for the other partners not to be forced suddenly to be in business with an ex-spouse or an heir of the person with whom they originally agreed to do business.

In sum, a partnership agreement will attempt to narrow the disputes and issues that confront partners on a day by day basis, particularly in a closely held business.  No matter how much trust exists among partners going into a  partnership, it is prudent to prepare for the future and to provide as much certainty as possible.   

Source: Todd & Levi LLP, "Commercial Litigation," accessed Jan. 19, 2018

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