Understanding Shareholder Agreements for Texas Companies

The first step in making your business official is registering it with the Texas Secretary of State. The second step is to formalize how exactly the business is going to be operated. Governance documents are a key element, and one of the main types you should know about is the shareholder agreement.

Drafting and executing a comprehensive shareholder agreement is essential to protecting the rights and interests of your business. Your company should have the assistance and guidance of a Houston business law attorney.

With the Oracle Legal Group representing you, your organization can focus on what it does best.

The Basics of Shareholder Agreements

A shareholder agreement is a written document that details the rights, duties, and responsibilities of company shareholders. The objective is to create a legal framework that dictates the internal governance and management of the company. Additionally, a shareholder agreement protects the interests of the individual shareholders.

Every business is unique, and by extension, every business needs its own governance documents. To that end, it’s not a good idea to use a generic template or simply copy another company’s shareholder agreement. Your company should have the assistance and guidance of a Houston business law attorney.

What Types of Businesses Need Shareholder Agreements?

LLCs, corporations, and partnerships with more than one shareholder should have a shareholder agreement. This is especially true for companies in which shareholders are actively involved in business operations.

In particular, businesses with these characteristics should seriously consider adopting one of these agreements.

Unequal Ownership Percentage

If shareholders have unequal percentages of ownership, they all need to understand their rights and duties. That means the agreement should clarify everyone’s voting rights, profit distribution, and control of the business.

Businesses with Complex Organizational Structures

Some companies are more complicated than others. Those with complex ownership structures, subsidiaries, or intellectual property rights should adopt a shareholder agreement.

Relatives and Friends as Shareholders

If you have close people in your life serving as shareholders, this could complicate matters. A well-drafted shareholder agreement can put clear boundaries in place and ideally prevent future misunderstandings and conflicts.

Shareholder agreement

What’s Included in Shareholder Agreements?

Although every shareholder agreement is different, they all tend to have similar provisions. Talk to your Houston business lawyer about the following items.

Ownership and Equity

This clause dictates how the company’s shares will be distributed among its shareholders. Terms regarding the issuance of new shares, transfer restrictions, and pre-emptive rights may also be included.

Shareholder Responsibilities and Roles

Each shareholder should understand his or her role and responsibility in the company. If shareholders are to make specific contributions to the company, those contributions should be addressed here.

Management Roles

Included here is the core of decision-making authority. More particularly, this clause determines how the company will be managed and how significant decisions will be made. Voting rights and the appointment of directors may be covered too.

Financing

This concerns how the business will secure its funding and how shareholders could be affected. Loans, equity offerings, and other means may be addressed in this clause.

Share Transfers

There are typically conditions under which shareholders are permitted to transfer their shares. However, any restrictions or rights of first refusal that may apply, plus valuation methods, should be included.

Dividends and Distributions

This section will establish how profits are to be distributed among the company’s shareholders. Included here should be rules for declaring dividends.

Confidentiality and Non-Compete

Your company must protect sensitive information from being released to the public or to competitors. Meanwhile, a properly drafted non-compete clause can limit shareholders from competing with your business.

Shareholder Exit Strategies

If a shareholder’s death, incapacity, or simply desire to sell shares arises, there should be ways to handle such events. Buy-sell provisions, drag-along rights, and tag-along rights are a few examples.

Dispute Resolution Methods

It’s a good idea to set up mechanisms for resolving disputes among shareholders. Some examples are arbitration and mediation, the details of which an attorney can explain.

Ready to Begin Working on Your Shareholder Agreement? Reach Out to Us.

The Oracle Legal Group handles a diverse array of legal issues that affect Houston businesses of all types. Let us get started working on your company’s shareholder agreement today. Give us a call to schedule your free initial consultation.

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