Just as a prenuptial agreement sets the terms for marriage, a Unanimous Shareholder Agreement (“USA”) functions as a "business prenup," defining the rules and expectations among shareholders. Managing a successful corporation requires active decision-making, balancing competing priorities, and detailed organizational planning. Often, as businesses grow rapidly, organizational planning can be overlooked. Disputes can occur unexpectedly for any number of reasons, such as illness, disability, bankruptcy, divorce, and death. For example, in the case of death, beneficiaries may inherit the shares, which may not be desirable. What if a shareholder goes through a divorce and their ex-spouse is entitled to a portion of their shares? This agreement can prevent messy disputes and provide a clear framework for resolving conflicts, much like a prenup can simplify divorce proceedings.
With this in mind, you may want to consider what to include in your USA and whether your corporation could benefit from it.
Decision-Making Provisions
One critical role of the USA is to outline how corporate decisions should be made. For instance, when one shareholder owns majority shares in a corporation, it is important to solidify what decisions are not to be decided by a simple majority vote in a contract, such as when contracts over a certain dollar amount are being entered into. This can help prevent deadlocks and ensure that major decisions are made collaboratively (or at least consistently).
Supermajority and Unanimous Approval – The USA can specify that certain decisions require a supermajority (e.g., 66% or 75%) or unanimous shareholder approval. Typically, these are critical decisions that require a higher level of approval than standard operational decisions, such as mergers and acquisitions, amendments to the company’s bylaws, or approval of substantial expenditures.
Board Composition and Removal – The agreement can detail how directors are selected and removed, including establishing the minimum and maximum numbers of directors on the board. It may guarantee certain shareholders a position on the board, ensuring that the board represents the interests of all shareholders.
Restrictions on Transfer and Ownership of Shares
Another critical aspect of a USA is managing how shares can be transferred. This ensures that shares remain within the control of trusted parties and protects the corporation from unwanted external influences. Shareholders may have varying degrees of capital invested in the corporation, and therefore, smaller shareholders may wish to preserve their interests through an agreement.
Right of First Refusal – This clause requires a shareholder who intends to sell their shares to offer them first to existing shareholders on the same terms as any third-party offer.
Shotgun – Also known as a buy-sell agreement, this provision allows shareholders to establish the terms and price of their shares. The other shareholder must either buy the shares at that price or sell their own shares to the initiating shareholder at the same price.
Piggyback (Tag-Along) – If a shareholder decides to sell their shares to an external party, this clause gives other shareholders the right to join the sale, sell their shares on the same terms, and exit the company.
Drag-Along – This clause allows majority shareholders to force minority shareholders to join in the sale of the company and their exit. If a majority shareholder finds a buyer for their shares, they can require the minority shareholders to sell their shares under the same terms, ensuring that the sale can proceed smoothly and potentially at a higher value due to the unified sale of the entire company.
Advantages and Disadvantages of USAs
USAs offer numerous advantages, such as clear decision-making processes and mechanisms to handle unexpected changes in share ownership. They provide value by promoting predictability in corporate governance. Greater predictability means a lower likelihood of conflict and a greater focus on the corporation's actual business rather than governance issues for shareholders. However, USAs also come with disadvantages, including potential liabilities for shareholders and the complexity of balancing the rights of new and existing shareholders. Understanding these pros and cons is crucial for determining whether a USA is the right choice for your corporation.
Conclusion
USAs help prevent conflicts, manage decision-making processes, and protect the interests of all shareholders. However, they must be carefully drafted to balance the needs of the corporation and its shareholders, ensuring flexibility for future growth and changes. By understanding the advantages and disadvantages, corporations can make informed decisions about implementing a USA that supports their long-term success.
At Outsiders Law, we care about safeguarding your business's interests. Reach out to our Business Law team for comprehensive support in creating a customized USA that suits your specific needs.
Disclaimer
The information provided in this article is for educational purposes only. Nothing contained herein should be considered as legal, professional, or tax advice. Please contact us directly if you require legal assistance.
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