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How may a shareholders’ agreement prevent disputes?

by | Jul 13, 2022 | Business Law

Owners of close corporations registered in California may sell shares of their businesses to raise capital. If you started a new business or need funds to expand, a well-written stockholders’ contract could help you attract investors and build mutually rewarding relationships.

The Corporate Finance Institute explains that a shareholders’ agreement outlines the number of shares and their issue dates. The contract notes how much each shareholder owns. Terms typically include how often the company pays dividends or distributes cash to stockholders. Contracts also describe how a company issues its stocks and how investors may buy or sell them.

How may an agreement direct a company’s operations?

A shareholders’ agreement may protect a business and its shareholders from disputes that lead to litigation. Your contract may include details about how management makes its decisions. It could also explain when shareholders may vote on an outcome. Terms could illustrate how often board members change and how shareholders nominate or vote for them.

An agreement could outline each shareholder’s rights and responsibilities. You may, for example, outline the amount of time before a new stockholder may sell or transfer shares. Restrictive covenants may prevent a shareholder from investing in or working for a competitor.

How may an agreement prevent disputes between minority and majority owners?

Forbes reports that an effective agreement includes provisions that promote a balance between minority and majority shareholders. Corporate decisions rely on votes of approval. Stockholders with small ownerships may, however, sell their shares when they believe their votes do not influence the company’s direction. Provisions that certain decisions must receive unanimous shareholders’ approval may prevent disputes that could cause minority owners to sell.

Ironclad shareholder agreements may prevent disputes by stipulating ground rules for management decisions and voting rights. Protecting minority shareholders may attract investors that could offer your company meaningful and advantageous relationships.