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What is a Shareholder Agreement?

Shareholder agreements are the governing agreements between shareholders of a corporation. In New York and New Jersey when small closely held companies are typically established as a corporation. For the small closely held company the shareholder agreement is sometimes thought of and referred to by its shareholders as a "partnership agreement". The shareholder agreement identifies and sets out the management of the business and addresses rights and responsibilities, including:

  • The voting rights of each shareholder;
  • The percentage of shareholder vote required for significant business decisions such as the procurement of loans, investing in new equipment, purchasing real property and hiring and firing employees;
  • The officers and directors of the company;
  • Restrictive covenants between the shareholders respecting the sale of their stock shares and their ability to compete with the company or with one another;
  • The rights of each shareholder upon the liquidation or sale of the company;
  • Required capital contributions;
  • The rights of each shareholder upon the death or disability of another shareholder.

Limited liability companies (LLC's) are slightly different from corporations. In LLC's there is no "shareholder agreement" but rather a "Member Operating Agreement". While the titles are different the Shareholder Agreement and Member Operating Agreement operate in a very similar way and the foregoing issues apply equally to Member Operating Agreements.

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