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If you and your business partners start butting heads on a decision or an issue, you’re going to need a strategy to work things out.
When there is no Shareholder Agreement in place between all owners, you could be flying blind. Without a Shareholder Agreement, there is no clear path to working out differences – except for talking and talking in circles until someone gives in or gives up.
One main advantage to having a Shareholder Agreement is that you can build in a way to work out arguments between shareholders. Here are a couple of ways a Shareholder Agreement can do that:
Build in voting thresholds that make sense – earlier, we discussed the different kinds of decisions in a Shareholder Agreement – directors resolutions (simple majority and special majority) and shareholder resolutions (simple majority and special majority). When setting up a Shareholder Agreement, think carefully with your business partners about what kinds of decisions different stakeholders should make, and in what majority. Should any decisions for more than $10,000 require special majority approval from directors? Does anything involving bringing debt into the company need unanimous shareholder approval?
Include deadlock provisions or a dispute resolution mechanism – our template Simple Shareholder Agreement includes dispute resolution clauses. The owners of a business can specify that when there is a deadlock on a particular decision, or an owner strongly disagrees with a decision, an expert has to be called in to make a decision. This expert could be an accountant or corporate advisor to help the business make a particular decision. That decision can be binding or not binding on the owners.
If the owners still don’t agree or have some kind of dispute, the next step that the Shareholders Agreement might require is that the owner who isn’t happy with the decision / issue can offer to sell his shares to the other owners, and if none of them want to buy his shares, he can then sell them to another interested party.
More than anything, the process of pulling together a Shareholder Agreement can help a lot of owners go through the mental exercise of thinking of what they will do in a scenario like this. Writing up a Shareholder Agreement forces business owners to turn their minds to this question – realistically, how are we going to work out our problems, and what are we going to do if we can’t?
What kinds of issues have you and your business partners fought about? Were these dealbreakers for any of you?