Two shareholders shake hands

5 Shareholder Agreement Mistakes Not To Do

Perhaps one of the most important pieces of advice for entrepreneurs and small business owners is to ensure that everything is put in writing. Contracts and agreements are essential to protecting yourself and your business interests against future uncertainties.

Unfortunately, the excitement of starting a new business with others can lead you to make errors in drafting agreements with your fellow business owners and investors. While you may not realize it right away, shareholder agreements that contain these mistakes can lead to costly litigation later.

Five of the most common mistakes that can happen when drafting shareholder agreements include:

1. Not Making Any Shareholder Agreement at All

No matter how tight your friendship might be with your fellow shareholders, you need a written agreement that documents your mutual understanding. 

Handshakes and oral agreements are nearly impossible to prove in court when disputes arise, and in the absence of an agreement, a court will resort to statutes and other authorities to resolve disagreements.

2. Failing to Contemplate Divorce and Death

The personal lives of your shareholders can have a significant impact on your business, and nowhere is this more apparent than in situations of divorce and death. Both circumstances can lead to shares of your business passing to individuals you may not necessarily want to have any interest in your business. 

Therefore, your shareholder agreement should address how shares can be purchased back by the other shareholders in these situations.

3. Not Addressing Voting and Deadlocks

Business ownership is generally accompanied by the right to participate in making decisions that affect the business. If you do not intend for all shareholders to have a voice or to have an equal say in how the business is run, this needs to be specified in your shareholder agreement. 

Your agreement should also spell out how decisions will be made when voting members cannot agree on a course of action. Otherwise, your business can get mired down in litigation by shareholders who feel they are disenfranchised or who do not agree with the direction your business is going.

4. Leaving Out Provisions for Shareholder Exits

Not all of your initial shareholders will remain with your business long-term. A shareholder who seeks to leave the company should not be able to continue exercising control over your business. 

However, without an agreement to the contrary, a business owner can take their shares with them when they voluntarily leave your business or sell those shares to someone else.

A well-drafted shareholder agreement can prevent this by addressing what is to happen when business owners decide to step away from the business. Such provisions can allow the remaining shareholders to buy out the one who is leaving and thus retain control over their shares.

5. Failing to Protect Confidential and Private Information

Shareholders can come into possession of valuable information about your business, its intellectual property, and its anticipated decisions. It would be a mistake not to limit their ability to disseminate this information to competitors or to the public. 

For this reason, a comprehensive shareholder agreement should address what information about your business is confidential and what happens if shareholders share it without authorization.

How a New York Business Law Attorney Can Help

You do not have to try to create a shareholder agreement yourself and hope for the best. A New York business law attorney from the Kohan Law Group can ensure any contracts and agreements your business needs are drafted properly and in your best interests. 

Serving Suffolk, Nassau, Westchester, and Rockland counties, along with the five boroughs of New York, we are equipped with the experience and knowledge necessary to help protect your business and keep you from needless litigation. Contact us to schedule your consultation today.