When starting a business with multiple partners, there should be some type of operating agreement or stockholders agreement in effect. Too often our attorneys receive phone calls from prospective clients with issues regarding the operations of their company, and in particular, issues with their partners. To avoid these situations, an operating agreement or stockholders agreement should have been in place prior to the commencement of the operations of the business. A few items to consider before starting a business are listed below.
Restrictions On Transfers. Provisions are often inserted in an operating agreement or stockholders agreement to restrict a parties or a company’s transfer (including a sale, assignment, pledge or any other manner of encumbrance) of any shares or rights to acquire any shares (such as options, securities or warrants).
This type of provision will
- ensure that the stockholders will be required to continue to own shares and will therefore have a vested interest in the success of the company;
- ensure that, for as long as the restrictions apply, the relative ownership and management of the company will remain predictable and certain; and
- prevent third parties, with whom the stockholders do not have a relationship, from becoming substantial stockholders of the company.
Right of First refusal. It may be desirable to give all stockholders the right to purchase shares from a party desiring to sell his or her shares prior to the shares being sold to a third party (i.e. a pre-emptive right). How does a Seller offer shares? Time acceptance periods? How could a Stockholder(s) offer to buy shares from other Stockholders?
Tag Along Rights. A stockholders agreement can also provide for co-sale rights, also known as “tag along rights,” to stockholders. If a stockholder wishes to sell or transfer shares, the selling stockholder would have to notify the other stockholders of the terms of the transfer or sale. Thereafter, each of the other stockholders would have the right within a certain period of time after such notice to “tag along” in the sale and to sell his or her shares.
Drag Along Rights.The stockholders agreement could provide that if one stockholder elects to sell all or part of his or her shares, then the stockholder would have the right to require the other stockholders to join in such sale on the same terms as the original selling stockholder, so long as the other stockholders receive at least a certain price per share.
Death or Disability. What happens upon death or disability. Should a stockholder or company have the right to purchase to the deceased or disabled stockholder’s interest? How will a value be placed on the shares?
Management. Who is authorized for certain actions, i.e. entering into debt obligations, approving contracts outside the ordinary course of business, entering into any contract above $x, authorizing the lending (or borrowing) of money by the corporation, hiring employees, etc.