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Three Things to Know About Shareholder Agreements

The Texas Business Organizations Code allows for businesses to enter into shareholder agreements, which are governed by §21.101 through §21.109 of the Texas Business Organizations Code.  The code governs all aspects of what a shareholders’ agreement can and cannot include, but three of the most important aspects of a shareholders’ agreement are: 1) voting rights; 2) restrictions on transferability of shares; and 3) governance of the corporation.

  1. Voting Rights
    Shareholders’ agreements can define how a shareholder can vote with his or her shares.  For example, it can state that a shareholder must vote all of his or her shares for one particular person to be elected to the board of directors, or it can allow the shareholder to split his or her votes among several different candidates.
  1. Restrictions on Transferability of Shares
    Shareholders’ agreements can restrict the transfer or registration of shares if the restriction is reasonable, and falls into one of several categories.  The agreement can require that the shares to be transferred must first be offered to the corporation or the other shareholders.  It can also condition the transfer of the shares on approval by the corporation to make sure that the transfer does not violate any law.  The agreement can obligate the corporation or “another person” to buy the shares.  It can also block the transfer of shares to a designated person or group provided that the designation is manifestly reasonable.  The agreement can restrict transfers that will jeopardize the company’s S corporation status, or that will preserve a tax advantage of the corporation.  It can also restrict the transfer of shares that will jeopardize the corporation’s “close corporation” status under the Texas Business Organizations Code.  Finally, the agreement can allow for automatic transfers of some or all of a shareholder’s shares to the corporation, other shareholders or another “person or group of persons”.
  1. Governance of the Corporation
    The shareholders’ agreement can set out how the corporation is to be governed, provided that all shareholders agree on the terms of governance.  There are a number of categories in which the Texas Business Organizations Code allows a shareholders’ agreement to define the governance of the corporation.  Among these categories, the shareholders’ agreement can define the following things.  The shareholders’ agreement can restrict the discretion of the powers of the board.  It can eliminate the board of directors, and authorize the business and affairs of the corporation to be managed by one or more of its shareholders or other persons.  It can establish who shall serve as directors or officers of the corporation.  The agreement can set out the term of office; the manner of election and removal; and the terms and conditions of employment of a director, officer, or other employee of the corporation, regardless of the lengths of employment.  It can set out how the authorization of distributions will be governed.  It can determine the manner in which profits and losses will be apportioned.  It can authorize arbitration or grant authority to a shareholder or other person to resolve any issue where there is a deadlock among the directors, shareholders, or other persons authorized to manage the corporation.  The agreement can require the winding up and termination of the corporation at the request of one or more shareholders, or on the occurrence of a specified event or contingency.  Finally, the shareholders’ agreement can govern the exercise of corporate powers, the management of business and affairs of the corporation, or the relationship among the shareholders, the directors, and the corporation as if the corporation was a partnership or in a manner that would otherwise be appropriate only among partners and not contrary to public policy.

As you can see, the Texas Business Organizations Code gives companies a lot of leeway in crafting a shareholders’ agreement that is appropriate for its business.  If you are forming a Texas corporation, it is vital that you speak with a business attorney who can walk you through the process to determine how to properly form your company.  This is vital to ensure that your company runs smoothly, and avoids problems in the future.  An Arlington TX business law attorney can help you through this process, and get you started on the right track.

BAThanks to our friends and contributors from Brandy Austin Law Firm PLLC for their insight into shareholder agreements.

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