Shareholders’ Agreement – Is it Necessary?

150 150 Abe Wehbi

By Abe Wehbi

Okay Founders, with incorporation complete, you are probably now eyeing down the packet of documents provided to you by your lawyer (Articles of Incorporation, Bylaws, and Shareholders’ Agreement). While the Articles of Incorporation create the Company in Delaware, the Bylaws and Shareholders Agreement are provided for the more internal, day-to-day governance of the Company.

Typically, along with the Articles of Incorporation, you receive Bylaws for your Company. Bylaws set forth the operation of the Company as a whole; detailing meeting locations, notice requirements, voting mechanisms, and other requirements for the everyday operations of the Company. Generally speaking, the Bylaws dictate how the Founders and Shareholders interact with the Company at an organizational level.

What is not covered in the Bylaws, however, is how the Founders or Shareholders interact with one another, as it affects the Company. A Shareholders’ Agreement will fill in these blanks, and provide for all of the necessary provisions and mechanics that promote harmony between the Founders and the Shareholders. Unlike the Bylaws, a Shareholders’ Agreement will detail the transferability of shares, and any restrictions on transfer, as well as any buy-out provisions, which are useful later on.

Founders, I know what you are thinking, “yet another document from my lawyer that I have to review and sign!” But, knowing the key importance and the role of each document will only help to clarify your understanding of the governance of the Company, and prevent from any deviations in intention down the road.



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