The Importance of Shareholder & Buy/Sell Agreements

• October 23, 2015
• Business Law

Many people dream of owning their own business and being their own boss, but often, that dream is hard to achieve without some sort of collaboration. That’s why aspiring entrepreneurs may choose to team up with friends or family to launch a business. Those ventures can be successful, but without adequate planning, they can also lead to strain on personal relationships and other negative consequences. Shareholder and buy/sell agreements are essential legal documents for small businesses, especially when friends and family are involved. A verbal promise or a handshake isn’t adequate protection for one’s interests. Individual priorities may change over time, and business partners – no matter how much they trust each other – should always prepare for worst-case scenarios.

Buy/Sell Agreements

Here’s a hypothetical scenario: Three friends open a restaurant together, with a verbal agreement that they’ll split the profits evenly among themselves. But after a few years, one of the partners wants out. He had used some of his own money to pay for restaurant equipment, and now he wants his partners to reimburse him for that expense, plus pay him his portion of the restaurant’s estimated future earnings. The remaining partners don’t have the funds to pay him what he’s asking, and they find themselves in a potentially costly legal situation. A buy/sell agreement can prevent some of the most common legal disputes that occur in small businesses. It outlines what will happen in the event an owner dies, becomes disabled, leaves voluntarily, or is terminated by other partners. If a business partner were to die, a buy/sell agreement can define how that partner’s spouse is compensated; rather than inherit a deceased spouse’s interest in the company, the surviving spouse could instead receive a payout amount, with no control over the business.

Shareholder Agreements

A shareholder or stockholder agreement is a bit more complex than a buy/sell agreement, because it defines the actions and make-up of the board of directors. Not all small businesses will have a board of directors, but those structured as a corporation or S-corporation are generally required by law to have a board. And businesses that are funded by investors must create a board of directors and appoint investors to the board. Shareholder agreements can specify how many members serve on the board, how they’re appointed, how vacancies are filled, and under what grounds a board member may be removed. Shareholder agreements should also clearly outline the extent of the board’s decision-making power. Other provisions commonly included in shareholder agreements concern how stock shares are issued and transferred, how the price for stock is determined, and what happens if the company chooses to dissolve or file for bankruptcy. Lusk Law, LLC helps small businesses avoid litigation when possible and is ready to actively represent our clients in court when litigation is necessary. Our experienced attorneys have provided legal counsel and representation to small businesses in Howard County, Baltimore County, Baltimore City, Frederick County, Carroll County, Washington County, and Anne Arundel County, and other counties in Maryland. If a conflict does arise concerning small business matters, Lusk Law, LLC is ready to assist owners facing formal complaints or litigation. Business owners in Howard County, Baltimore County, Baltimore City, Frederick County, Carroll County, Washington County, and Anne Arundel County, and throughout Maryland can rely on us to handle cases involving shareholders or other matters. With over a decade of experience in representing business owners, we’re ready to offer a consultation concerning your rights. Please call us at 443-535-9715 or fill out our contact form if you have any questions about this topic.