A shareholder agreement is crucial for the formation of any business entity in New Jersey. This type of agreement describes the relationship between the shareholders or partners and the operation of the business. Additionally, a shareholder agreement often contains the rights, obligations and potential remedies of the shareholders.
Unfortunately, all partnerships in New Jersey are not formed with an agreement in place, which can be problematic, especially for minority shareholders. An experienced New Jersey minority shareholder rights attorney could help ensure the agreement contains the necessary terms to provide adequate protections.
1.) Decision-Making Authority
Shareholder agreements often include terms describing how decisions will be made in the business and each shareholder’s decision-making authority. Generally, a minority shareholder is not granted much decision-making authority when it comes to the daily affairs of the business.
It is important to understand that a decision made by a majority shareholder or multiple shareholders does not qualify as oppressive behavior simply because it negatively affected a minority shareholder. New Jersey courts typically analyze whether a decision or other conduct of the majority shareholders negatively affects the minority shareholder’s investment and reasonable expectations of their role and duties in the business.
2.) Buyout Agreement
A buyout agreement is essential for a minority shareholder to have adequate protections in the shareholder agreement. A buyout agreement includes the events that would lead to a buyout of a shareholder and the steps to determine the price of a shareholder’s ownership interest
The list of buyout events should be extensive to provide protections for a variety of situations. When a buyout event occurs, the agreement controls how and when the buyout will take place to help prevent costly litigation.
3.) Ow
nership Interest
The shareholder agreement should clearly address the ownership interests of each partner in the business. For instance, if ownership is equally split between two partners, the agreement should reflect a 50/50 split; however, minority shareholders typically own less than half of the ownership interest in the business.
The ownership interest in the business often follows the amount of initial financing provided by each party, so it is important to include the amount and description of each individual’s contribution to the business.
4.) Specific Business Issues
Defining specific issues that could arise in a partnership or business could be essential in preventing foreseeable disputes. When a minority shareholder does not have the requisite decision-making authority to make changes, having potential issues defined in the shareholder agreement could be a good way of maintaining some power within the business.
It may not be possible to define every specific business issue in the shareholder agreement, but having some protections could prevent significant litigation costs in a dispute.
5.) Right to Financial Information
As a minority shareholder, some information may not be readily available or provided, especially when a minority shareholder is not involved in a certain decision. As such, a clause in the shareholder agreement giving the minority shareholder access to financial information of the business could help avoid potential issues.
6.) Right of First Refusal for Ownership Interests
The right of first refusal relates to the existing ownership in the business. This term allows other shareholders the option to purchase an existing shareholder’s ownership rights in the business before said ownership is offered to parties outside of the business.
The right of first refusal can be advantageous to a minority shareholder and help prevent unwanted majority shareholders from taking over; however, it could also slow the process when a minority shareholder wants to sell their ownership interest.
7.) Non-Compete Agreement
A non-compete agreement is commonly used within a shareholder agreement to prevent individuals from leaving the business and immediately starting a similar business. A non-compete agreement also prevents current owners from establishing competing products or services while also working for the business.
For a minority shareholder, a non-compete clause within the shareholder agreement could help prevent majority shareholders from making decisions that could harm the business. On the other hand, a non-compete clause could become especially problematic to a minority shareholder if they are frozen out of a business and must work to start a new business.
8.) Approval of Capital Expenditures
Unfortunately, for minority shareholders, decision-making authority in the business is typically left to the majority shareholders. However, one way for a minority shareholder to protect their investment is through a capital expenditure approval clause. This clause requires a minority shareholder’s approval when a large expenditure is entered into by the business.
In the event of a freeze out, an approval clause could help a minority shareholder remain involved in major expenditure decisions.
9.) Pre-Emptive or Anti-Dilution Rights
A pre-emptive rights clause in a shareholder agreement gives the shareholders the right to purchase any future offerings of ownership interests issued by the business. This clause is important for minority shareholders because it allows them to protect their percentage of ownership within the business and avoid dilution of their ownership.
10.) Dissolution
Any shareholder agreement should include terms addressing the steps to end or dissolve the business. When a business or partnership begins, nobody wants to discuss the possible end; however, it is important to understand that issues arise and a business may be required to end.
State law typically governs the necessary forms and rules for dissolution, but the dissolution clause could also include how the assets of the company will be split between the shareholders.
Contact a New Jersey Minority Shareholder Dispute Lawyer to Review Your Shareholder Agreement
A minority shareholder can often find themselves at the mercy of the majority shareholders when it comes to significant business decisions. For this reason, it is critical to have a detailed and fair shareholder agreement in place that provides adequate protections for the minority shareholder.
A shareholder agreement typically includes several terms that an individual may not fully understand. And this article has only laid out ten terms to consider. It’s not an exhaustive list. A knowledgeable New Jersey minority shareholder dispute attorney could help evaluate a shareholder agreement to help avoid potential disputes in the future.
Let’s discuss your oppressed minority shareholder or business dispute matter today. Contact me today or call at 201.342.1700 for a complimentary consultation.
