Shareholder Buy-Sell Agreements and Restrictive Covenants Are a Key Part of All Employment Contracts

By Fredrick P. Niemann, Esq., a NJ Shareholder Dispute Attorney

 
Shareholder’s agreements should be an essential part of every small corporation’s structure in New Jersey. These agreements outline every aspect of  corporate government and shareholder ties to the business, including ownership and voting rights, control and management of the corporation, methods of resolving disputes, and two key provisions known as the buy-sell agreement and the restrictive covenant.

Buy-sell provisions and restrictive covenants are both integral parts of a quality shareholders agreement, particularly in smaller businesses with fewer shareholders. Smaller corporations often elect to establish ownership via shares in the business. For example, a small corporation with four co-owners elects to establish that each member owns 25 shares out of 100, thus 25% of the business. The shareholders agreement is an agreement between all of the shareholders in the corporation and will serve as the main document that Courts will look to whenever a dispute arises.

Shareholders agreements can be simple or complex and everyone is unique to the corporation it is written for. While many shareholders today are knowledgeable enough to make these agreements, they often are created without the assistance of a New Jersey Shareholders Attorney, thus lacking key components that leave many of the shareholders vulnerable. The buy-sell agreement and restrictive covenant provisions are two of these key components.

A buy-sell agreement dictates what will happen to the shares of a shareholder who wishes to leave the company. Since a shareholder who wishes to leave must sell their shares, a dispute often arises as to who they are selling their shares to and what price they are being sold for. Often the departing shareholder will want to sell shares to the highest bidder. This may be someone that the remaining shareholders do not want to be in business with. Also, if the corporation itself or the remaining shareholders are “buying out” the departing shareholder, the departing shareholder often thinks the shares are worth more than the remaining shareholders do. Fortunately, a typical buy-sell provision settles these disputes beforehand, stating who will buy the shares and the price they will be bought at when a departing member leaves the corporation. If any debate arises as a shareholder is leaving, the Courts will simply enforce the shareholders agreement and the buy-sell provision.

As for restrictive covenants, these are most useful for smaller corporations that licensed professions and professions involving particularized skills, such as doctors, attorneys, scientists, etc. A restrictive covenant lays out an area around the business where a departing member is forbidden from working, whether it is with another rival corporation or in their own practice. As long as they are reasonable in space and time, Courts will uphold restrictive covenants. These are useful to prevent a shareholder from departing and stealing clients from the remaining shareholders.

Shareholder agreements are complicated and should involve many different aspects that the normal shareholder often does not think of. Always consult a shareholders attorney before signing such an agreement. Please contact Fredrick P. Niemann, Esq., a NJ Shareholders attorney, today toll-free at 888-800-7442 or by email at fniemann@hnlawfirm.com/.  For further information, go to http://www.youtube.com/user/NJBusinessLaw#p/search/0/pKIalQAdprY to learn more.

Posted in Business, Employment Law, Shareholder and tagged .