There may be some who long for the days when a business could be run on a person’s word and a handshake. Those days, if they really ever did exist, don’t any longer. As we have noted in a number of posts, including one early last month, it is more important than ever to have agreements in writing. We highlighted three basic contracts that every North Carolina business would benefit from having on hand.
One of the contracts we noted was a partnership agreement. Another term for this might be a shareholders’ agreement. Even if a company is small, an element of its formation can be the establishment of a share structure that assigns percentages of company ownership and responsibility.
Perhaps the best way to think about a shareholders’ agreement is that it is a lot like prenuptial agreement. The analogy is a solid one. Business partnerships, like marriages, are usually entered into for the long term. Signatories to the deal are expected to share common visions about what success looks like and be prepared to make necessary sacrifices to achieve the ends. The agreement clearly spells out duties each party will perform toward that vision.
But as we all know, change is the only real constant in life. That goes for business, too. Whether the drive for change comes from outside or internally, the ability to adapt to that change is crucial, even if it means a divorce at some point down the road.
In this regard, a shareholder agreement can establish rules on how shares are transferred to a third party. This is a way to ensure that a business has as much chance of staying in the hands of its founders as possible. The contract can also establish a process for share transfers if one partner dies. This might include taking out insurance policies on the partners, the proceeds of which could be used to cover a buyout, rather than forcing the business to pay for the purchase.
Without solid business formation and planning that includes things like shareholder agreements, there is always the likelihood that change could spark contentious litigation. Working with a business-savvy attorney is the way to limit that risk.