What is a Shareholder’s Agreement and Do I Need One?
We’ve previously written about the value of having an operating agreement governing the operations and management of LLCs. For instance, an operating agreement setting forth the role of each LLC member and creating dispute resolution mechanisms can often help to resolve future disputes.
Not every business is an LLC, however. Under Florida’s Business Corporations Act governing corporations, a corporation’s shareholders may enter into a “shareholder’s agreement,” which offers similar benefits to an LLC operating agreement.
Florida has generally recognized two forms of shareholder’s agreements. The first type, governed by section 607.0731, Florida Statutes, allows shareholders to agree in writing to vote their shares in a specific manner. For instance, multiple shareholders could agree in a contract to dissolve the corporation after 5 years. That agreement would then be binding on those shareholders and all parties to the agreement (or any subsequent recipients of those shares) would be required to vote for dissolution after 5 years. As of January 1, 2020, this type of shareholder’s agreement has been renamed a “voting agreement.” A voting agreement does not require unanimity of the shareholders.
The second type of shareholder’s agreement, pursuant to section 607.0732, is perhaps more important to small business owners. Like an LLC operating agreement, a shareholder’s agreement under this section allows the shareholders to override the default provisions of the Business Corporations Act, though the shareholders’ ability to do so is limited to ten specific actions. In a shareholder’s agreement, the shareholders may agree to:
- Eliminate the board of directors or restrict its powers;
- Authorize distributions to shareholders that are not in proportion to the number of shares owned;
- Establish rules regarding who can be an officer or director, their terms in office, or their removal and replacement;
- Establish rules regarding shareholder voting, including weighted voting rights or use of proxies;
- Create restrictions on officers, directors, or shareholders and their use of corporate property or services;
- Allow specific shareholders or agents to exercise corporate authority in the absence of a resolution by the board of directors;
- Require dissolution at a specific time or upon the occurrence of a specific event;
- Require a shareholder to reimburse the corporation’s attorney’s fees if the shareholder brings an “internal corporate claim,” like a derivative claim, against the corporation or its directors;
- Set a mechanism for breaking a deadlock among the directors or shareholders; and
- Establish rules governing the exercise of corporate powers or management of the corporation, so long as the rules do not violate public policy or other provisions of the Business Corporations Act.
This type of shareholder’s agreement requires the unanimous consent of all shareholders and must be set forth in writing – in the company’s articles of incorporation, in the company’s bylaws, or as a stand-alone written contract executed by each shareholder. The agreement can only be amended or terminated with unanimous consent of the then-existing shareholders. The agreement is binding on all subsequent shareholders as well. To protect subsequent shareholders who may not know about the agreement, the statute creates a limited right of rescission, allowing a subsequent shareholder to rescind his or her purchase within 90 days of learning about the agreement. The right of rescission expires after 2 years, however, so the window for rescission is quite small.
In a small, “closely-held” corporation, this latter type of shareholder’s agreement can be quite useful. First, it permits the shareholders to disregard some of the strict formalities involved with running a corporation. (This is one of the reasons most small businesses today are set up as LLCs.) Second, and perhaps most importantly, the agreement can be used ahead of time to set rules in the event of a dispute between the shareholders. Though you may think you and your fellow shareholders will never disagree, disputes among business partners are all too common.
Due to the complexity of this kind of agreement, it’s important to have a skilled attorney draft it. Otherwise, you may find yourself or the corporation exposed to liability in the event of a lawsuit.
If you find yourself in a dispute with another shareholder or involved in litigation over a shareholder’s agreement, give the lawyers at McCabe Rabin, P.A. a call.