Shareholder agreements are crucial in preventing disputes involving and between shareholders. They can break deadlocks, assign rules for majority and minority decisions and assign duties to shareholders. Establishing these rules in an agreement can make it easier to operate a business and resolve conflicts among current shareholders.
However, they can also prevent disputes when a shareholder exits a company.
Terms that affect departing shareholders
Whether a shareholder leaves their position through transferring their shares, removal or selling their shares, they could take with them valuable insight into a company’s operations and proprietary information. A shareholder agreement can put certain restrictions on activities to ensure a person does not disclose valuable information.
Some of the clauses that can do this include:
- Non-solicitation clauses, which prevents a person from enticing other shareholders, employees and managers to leave and compete with the original company
- Non-compete agreements, which restricts departing shareholders from engaging in competitive practices in certain locations or industries for a specific period after leaving
- Restrictions on transfers or buyouts, which can dictate who takes over the shares
These and other contractual terms can minimize the risk of a shareholder taking customers or sensitive corporate information with them when they leave, as well as maintaining some control over transfers of shares.
Without these clauses, companies can wind up facing expensive legal battles and devastating financial losses due to shareholder activities.
Legal protections to avoid lawsuits
Working with a lawyer to draft clear, enforceable shareholder agreements can be crucial. It informs all parties of their rights and restrictions that come with their role, making it possible for parties to avoid prohibited actions.
However, there are parties who may still engage in restricted activities. Under these circumstances, parties can have the courts enforce a shareholder agreement, which could result in contract cancellation or payment of damages.
Individual shareholders can have more influence than they realize, even when they leave a corporation. Businesses can protect themselves and other shareholders by discussing how to draft and enforce a contractual agreement to minimize adverse actions by departing parties.