It is usually prudent for the founders of a business to have an agreement in place that deals with such questions as: What if someone wants to sell his or her interest in the business to someone else? What if a founder dies, retires, declares bankruptcy, or leaves the company to compete with it? What if the founders become deadlocked in matters basic to the conduct of the business?
The appropriate answers to these and other questions will vary depending upon the nature of the business, the interests of the investors, the relative positions of the various founders, their respective personal circumstances, and a number of other factors. Counsel to the company can be helpful in identifying the questions that need answering, and in suggesting possible answers. Sorting through these questions is unpleasant when the founders are focused on building a new enterprise; but it can be catastrophic to the business and its owners if attention is deferred until the questions are no longer hypothetical.
For these reasons, we strongly advise business owners to develop and keep current a shareholders agreement that is appropriate to their circumstances.
Although shareholder agreements technically apply to corporations only, the issues addressed in a shareholders agreement are just as pertinent to non-corporate organizations, such as limited liability companies and partnerships. These issues are frequently dealt with in the operating agreement (in the case of an LLC) or the partnership agreement (especially if the entity is a limited partnership). In those cases, care must be taken to avoid using “off the shelf” language that is inappropriate to the circumstances of the parties.
Sunstein has experience in counseling shareholders in formulating appropriate shareholder agreements. Please contact our Business Practice Group for more information about these agreements.