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Guidance for Drafting Shareholders Agreements

February 2010

Seeing a need for attorneys who draft shareholder agreements to be fully aware of the statutes and case law that apply to these agreements, the City Bar’s Corporation Law Committee has prepared a report, The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions, which details specific laws that affect a whole array of provisions typically included in these agreements.

Shareholders agreements give certain shareholders rights beyond those inherent in owning shares.  This can mean, for example, the right to designate directors, restrict transfer of shares, or to require the corporation to seek the shareholder’s approval before taking certain actions.  The agreement itself is written to help lawyers ensure that their shareholder clients get the rights they believe they were promised in the bargaining process.

“Although ‘freedom of contract’ is the legal principle that governs many provisions contained in a typical shareholders agreement, there are numerous legal considerations that will affect their enforceability and effectiveness,” the report states.

“The members of the Corporation Law Committee discussed our experience with shareholders agreements, and felt that too many lawyers use precedents and forms for shareholders agreements that do not seem to take into account corporation law statutes and case law,” said Nancy Sanborn, Chair of the Corporation Law Committee.  Those statutes and case law, Sanborn explains, “must be complied with to ensure that the rights granted to shareholders in the shareholders agreement will be enforceable and can be implemented in accordance with those laws.

“We hope that this report will prompt lawyers to take into account these legal considerations, and therefore ensure that their clients will receive the benefits of their negotiated bargains,” said Sanborn.  “This report will be useful for all lawyers who draft, negotiate, interpret and/or implement shareholders agreements, which is most lawyers, to ensure that they actually work as intended.”

Read the Report, The Enforceability and Effectiveness of Typical Shareholders Agreement Provisions (12/09)

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