Small businesses and startups are no strangers to official documents. From a corporation's articles to bylaws – there are dozens of legally binding papers that are drafted, voted on, and signed. One document that should not be forgotten is a shareholder agreement, which protects the rights and shares of the owners in a company.
Thankfully, there are hosts of lawyers and attorneys familiar with public policy ready to help businesses draft thorough and legally binding shareholder agreements that follow all the Florida statutes.
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What is a Shareholder Agreement?
A shareholder agreement outlines the operations and management of your company and the part each shareholder plays in the company. While the document has many benefits, it isn’t necessary for every business.
A shareholder agreement is important because it lays out people’s responsibilities in the management of the business, corporate powers, and the rules involved with stock ownership. Having rules officially defined gives a roadmap for navigating shareholder disputes and avoiding legal battles over shareholders' rights.
How is a Shareholder Agreement Different from Bylaws?
A shareholder agreement is different from a company’s bylaws or articles of incorporation because of the personal tie it has with the individuals who draft it. Bylaws are created at the founding of a company and apply to everyone, while shareholder agreements are drafted by those it directly affects – people who own shares of the corporation.
Bylaws are legally binding general rules and protocols for the management of the corporation. They include responsibilities, rights, and positions within the company for each member.
While bylaws often include information about shareholders, shareholder agreements include more specific information affecting the individual shareholders who enter into the agreement.
Is a Stockholder’s Agreement the Same Thing?
A stockholder’s agreement is the same as a shareholder agreement. People use the terms stock and shares interchangeably in most cases. The difference between the two is very subtle. People can buy shares as individuals for most entities, while stocks tend to refer to businesses and corporations.
Who is Included in a Florida Shareholder Agreement?
A shareholder agreement is between all the shareholders in a business. Anyone who owns stock in an organization is considered a shareholder – but not all shareholders are equal. Generally, a majority shareholder owns more than 50% of the stock in the business, while a minority shareholder owns less than 50%.
Majority shareholders tend to be those in leadership roles, like the CEO or family of the founder.
Most stockholders are considered minority shareholders. Over 53% of Americans own some type of stock in a company, making them minority shareholders.
When someone buys stock in a business, they own part of that company. The average stockholder doesn’t have enough stock to hold power in a company or have a corporate claim unless they are a majority stockholder.
For example, one stock in Amazon costs nearly $4,000. Jeff Bezos, the founder of Amazon, owns 55.5 million shares – which is 11.1% of outstanding shares. An average stockholder would need to invest millions of dollars to even come close to being a majority stockholder in Amazon.
Who Needs a Shareholder Agreement?
Small businesses and S corporations gain the most from creating a shareholder agreement. Large businesses, like Amazon, have hundreds of millions of stocks. Startup businesses usually begin with around 10 million shares of common stock.
In the case of startups and small businesses, stockholders have a greater stake in the organization. To ensure fair treatment, protect their assets in the case of dissolution of the corporation, and create rules for the business, a shareholder agreement should be created.
What Does a Shareholder Agreement Cover?
A shareholder agreement covers the aspects of the company and stocks that directly affect the shareholders. Many shareholder agreements outline the pricing of stocks, the number of stocks, and who is allowed to own stock in the company.
Not only does a shareholder agreement cover the ownership of stocks, but it also covers the responsibilities of stockholders and legal protocols that should be followed in relation to the handling of stocks.
Each state or country has different rules for shareholder agreements. A person should consult their local attorney’s office before drafting a shareholder agreement.
Which Subjects Should a Florida Shareholders Agreement Cover?
If your business is based in the state of Florida, here are a few subjects that should be included in a Florida shareholder’s agreement:
- Names and dates of those involved with the agreement
- Rules on who can become a shareholder
- The order of ownership transfer between shareholder transferees
- Rules for buying or restricting shares
- Rights and responsibilities of shareholders
- Rights of minority shareholders and majority shareholders
- Protection of information within the business
- Provisions for handling disputes to avoid deadlock
1. Names and Dates of Those Involved with the Agreement
A shareholder agreement needs to identify those who are entering into the agreement. Each person who owns shares in a company will list their personal information like their name and contact information. It also records the shares owned by each shareholder.
The agreement will be signed and dated to designate that all those whose names are included have read and agree with the document.
2. Rules on Who Can Become a Shareholder
In large companies, there are very few rules in place as to who can buy stock in a company. Smaller companies, who are the ones using such shareholder agreements, do have some say in stockholders.
Because many small businesses are privately owned, they can set disclaimers on stock ownership in their shareholder agreement that controls who is a partner in the company. These rules protect the company from shareholders who might sell their shares to an outside company.
3. The Order of Ownership Transfer Between Shareholders
Ownership transfer refers to the protocol for who receives shares when someone no longer owns his or her shares (similar to “membership interests” In a Florida LLC Operating Agreement).
Small businesses that want to restrict who is in a position of power can make rules that shares can only be sold to other shareholders. This rule keeps the shares within the current business owners and avoids outside businesses taking over and changing the structure.
This section also outlines what happens to a share when a shareholder dies or otherwise loses their assets. It can divide the shares evenly among other shareholders or designate a certain person to receive the shares.
4. Rules for Buying or Restricting Shares
If shareholders allow for selling shares, they can establish a list of rules for how a shareholder goes about transferring or buying the shares.
Commonly, shareholders have priority in buying any shares that other members are selling before the share goes public.
This section of the agreement also outlines the market value at which shareholders sell each share. This price is often fixed for current shareholders who buy shares from other members.
5. Rights and Responsibilities of the Shareholders
Shareholders own parts of businesses and have certain rights as owners. The shareholder agreement outlines what these rights are. It designates the positions of power within shareholders, who has voting rights, and what areas of the business shareholders can control.
Not only do the shareholders have rights, but they also have responsibilities within the company. A company gives a list of commitments to each person who enters into the agreement. The shareholder is required to fulfill their responsibilities if they want to remain a shareholder.
If someone doesn’t fulfill their responsibilities, a shareholder agreement outlines what protocols the business will follow in response.
6. Rights of Minority Shareholders and Majority Shareholders
Minority shareholders don’t have the same rights as majority shareholders. The majority shareholders will often be board members, CEOs, and those associated with the founding of the company. They will have more rights as shareholders than smaller organizations and individuals who made lesser contributions.
These rights need to be clearly outlined so each person knows how much say they have in a company. Designating the roles avoids a shareholder taking legal action when they feel they are not given the power they deserve.
7. Protection of Information within the Business
Shareholders are allowed to sit in on company meetings, view many sensitive documents, and discuss confidential information about the organization. To protect the organization, a shareholder agreement should restrict the spread of information each shareholder receives.
The shareholder agreement can include both a Florida non solicitation agreement and non-compete agreement, which prevents shareholders from taking the information they learned while part of a business and passing it along to competitors when they leave the organization.
The agreement should also outline who is privy to what information – like only allowing majority shareholders to attend certain meetings. These rules need to be outlined in the shareholder’s agreement or else those who are not included may seek legal retribution.
Provisions for Handling Disputes
Even with a thorough shareholder contract, disputes will arise. Most shareholder agreements will end with outlining the proper protocol for handling all these disputes.
Jumping straight to legal retribution is a long, expensive option for handling disagreements. In total, businesses in the U.S. pay over $20 billion to cover attorney costs. Shareholders have other options for addressing wrongs.
- Negotiation: Negotiation is the easiest method for solving any issue. If shareholders include negotiation in their dispute management protocol, they designate a place for meeting and discussing grievances so that everyone is heard. Each party then tries to come up with a mutually beneficial solution to avoid any further legal action.
- Mediation: Instead of taking disagreements in front of a judge, shareholders can use an impartial third party – often an attorney – to listen to both sides. This person will help both sides reach a conclusion. Both parties are still allowed to take the case to court if they aren’t happy with the outcome.
- Arbitration: If mediation doesn’t work, shareholders can consider arbitration. It’s like mediation in that shareholders will discuss their grievances before a neutral third party – instead of taking the issue before a judge. The only difference is that arbitration is usually legally binding.
- Legal Action: Legal action should be a last resort. A legal case can take weeks to months to prepare. The actual case itself will take days of drawn-out discussions before any resolution is met. All this time equals money. Shareholders will also need to spend money on documents, witnesses, attorneys, and so much more.
Corporate Bylaws vs Shareholder Agreement: What Happens if There is Conflict?
A corporation shareholder agreement will include information in addition to what is included in the business bylaws and operating agreements. Usually, the information in the shareholder agreement is different from the bylaws – but occasionally there will be an overlap in rules that can cause conflicts.
A company will often amend bylaws as issues arise or the business changes. Changing a bylaw requires a 75% vote from the shareholders.
Instead of a general document, a shareholder agreement is specific for the shareholders currently involved with the company. It outlines relationships between the shareholders and how shares are distributed among those members. To change a shareholder agreement, unanimous consent of the shareholders is needed.
When a conflict arises, most shareholder agreements will trump the bylaws. To help resolve the conflict, a business will often amend the bylaws to match the shareholder agreement. This change helps to avoid similar issues from arising in the future.
Sample Shareholder Agreement Template
If you own a small business in Florida, consider creating a shareholder agreement. Here are a few sample shareholder agreement templates to get you started.
A simple shareholder agreement form is an effective way to outline what you and your shareholders would like to see in your organization – but they should not replace the advice of an attorney.
Lawyers help you fix vague wording, meet current legal standards, and craft official documents according to corporate law. They also help you in any dispute resolution.
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Need Help with a Florida Shareholder Agreement?
If you are a startup company, board of directors, or small business in Miami, Florida, meet with your local attorney for legal advice to create a shareholder agreement. This agreement will help you avoid disputes, protect your business shares, and clarify the responsibilities within your organization according to Florida law.
Cueto Law Group is a law firm that can help you draft a shareholder written agreement that is customized to meet your business law needs. Meet with a local attorney today.
