What points should be addressed in your corporation’s by-laws, shareholder agreements and other legal items?
Every business with more than one owner, including start-ups, should have a shareholders agreement.
Often times, especially in the early stages of a company, owners are wearing many ‘hats’: directors, officers and shareholders, as well as other technical and daily job duties. Each of these titles comes with different implications.
Board of Directors’ Meetings
For meetings, as a ‘board of directors’ it is important to establish the rate of pay for meeting attendance, as well as how many seats are available, how many votes are needed to pass an item, when resolutions are required, and other similar items.
Sometimes, depending on the nature of the corporation, aspects such as how many votes are required, or how many minimum seats are required, are governed by statutory law.
However, such items may also be governed by the corporations by-laws.
Think of corporation by-laws like ‘house rules’. Corporation by-laws can ascribe the various powers available to officers and other members of management.
Officers have duties and responsibilities as well as compensation and these should be well-defined.
Cover the Big ‘What-Ifs’
The Shareholders agreement should cover the big broad ‘what-ifs’ such as; what happens if a shareholder dies, becomes permanently ill, or disabled, what if a shareholder wants to buyout other shareholders or sell their shares, and how much the shareholders get paid and when.
Some of these matters can be handled separately in a founder’s agreement.
Founders Agreement vs Shareholder Agreement
A founders agreement covers the same material as a shareholder agreement and makes some important distinctions between external investors and founding members who are also shareholders.
Employment Contracts vs Shareholder Agreements
Other job specific items can be handled through an employment contract just like any other employee. However, the shareholders agreement should contain clauses as to what happens to share ownership in the event of termination from employment for poor performance, or even failure to come to work and continue actively growing the business, if this was intended to be part of their role.