Is Your Privately-Held Company’s Shareholders’ Agreement Obsolete?

For a private company, the shareholders’ agreement (sometimes referred to as the buy-sell agreement) is one of the most important legal documents to maintain. However, we find that many companies either don’t have one, or the one they have is old, outdated, and no longer relevant to the business.

The reason for this is that many view it as just a basic legal document that gets filed away with the rest of the corporate papers. This is a significant mistake – one that can cost a company’s shareholders greatly.

A well-crafted shareholders’ agreement should meet the following objectives:

1. Reflect the agreement between the shareholders regarding transactions in the company’s shares. The price, terms, and conditions of all shareholder transactions should be clear and easy to understand.
2. Protect the company from transactions that can damage its liquidity position and its ability to fund operations due to the effect of shareholder transactions.
3. Protect the shareholders and their families by providing liquidity for certain transactions.
4. Provide clarity so that costly disputes between shareholders are avoided.

In our work with private company clients, we often find mistakes in existing agreements that require quite a bit of effort to amend so the agreements are current and meet the needs of the business and its shareholders. Here is a checklist to determine whether your company’s shareholders’ agreement needs to be reviewed and updated. And of course, if your company doesn’t already have a shareholders’ agreement in place, it’s important to get started on creating one.

• Our shareholders’ agreement has been updated within the last five years.
• The company’s valuation in the agreement is readily measurable and reflects the current value.
• We have a good working knowledge of the triggering events that would cause a transaction between shareholders.
• We have a good understanding of the terms and conditions related to shareholder transactions and are comfortable that they would not put undue pressure on the company’s cash flow.
• We have reviewed our insurance coverage within our agreement and are comfortable that it sufficiently protects our shareholders’ families, considering the valuation of our shares.
• We understand how our agreement affects our shareholders’ estate planning.

If you cannot answer “yes” to these statements, it’s time to review your company’s agreement to make sure that it adequately serves the shareholders and the company.

Mario O. Vicari is a director with Kreischer Miller and a specialist for the Center for Private Company Excellence. Contact him at Email.   

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