Why are shareholders agreements important?

Corporations are often referred to as “creatures of statute,” which means that corporations have only those rights, powers, and liabilities conferred on them by state corporation laws. Because corporation statutes are drafted primarily to suit the needs of large corporations, they are not always a good fit for small, closely held corporations. This is especially true in two areas: corporate control and free transferability of shares. With regard to the former, the corporate norm is centralized management under the direction of a board of directors elected by a majority vote of the shareholders. In closely held corporations, however, the shareholders often see themselves more as partners, with each shareholder entitled to earn a living from, and have a say in the management of, the corporation. To deal with this reality, corporate statutes authorize shareholders to enter into agreements relating to any phase of the corporation’s affairs, including the management of its business, and permitting them to treat the corporation as if it were a partnership. See Cal. Corp. Code § 300(b). As to free transferability of shares, while that is considered a good thing in a large corporation whose shares are publicly traded, the handful of shareholders in a closely held corporation want to have control over the individuals they have to work with every day. As such, shareholders’ agreements usually impose restrictions on the transfer of shares, whether voluntarily or involuntarily by death, divorce, or bankruptcy. See Del. Code Ann. tit. 8, § 202(a). The most common type of share transfer restriction requires the departing shareholder to first offer her shares to the corporation and/or the remaining shareholders at a price determined in accordance with the shareholders’ agreement. For more information, see The Importance of Shareholders Agreements.