Colorado corporations (and Colorado s-corp) are governed by the corporation’s bylaws and often a shareholder agreement. (For a discussion on Colorado Limited Liability Company (Colorado LLC) Operating Agreements see our previous post). A shareholder agreement is a written agreement between two or more shareholders to establish voting arrangements and/or to protect the shareholders from being forced to accept strangers as fellow shareholders by providing for certain buy-sell arrangements. Shareholder agreements are typically used in closely held Colorado corporations (and Colorado s-corp).
Why are shareholder agreements important in a Colorado corporation? Well, like any other contract between parties, a shareholder agreement sets expectations and is a “road map” for how to handle important shareholder matters. Importantly, a shareholder agreement aims to put the control of important corporate matters in the hands of those who would be affected by certain matters: the shareholders.
The most common and important provisions contained within a Shareholder Agreement are:
Right of First Refusal
In the event a shareholder has received a bona fide offer to purchase his shares, and that shareholder wishes to sell his shares, a shareholders agreement could give the corporation a right of first refusal to purchase the shares. If the corporation declines, typically, the other shareholders would then have the right to purchase the shares of the shareholder. Of course, the price and terms of the stock purchase should be established in a buy-sell agreement.
Transfers, Death or Disability
Shareholders agreements in a Colorado corporation generally include the right of the corporation and/or the shareholders to purchase the shares of a shareholder in the event of an involuntary transfer, such as divorce or bankruptcy or where the shareholder’s employment has been terminated. Some shareholders agreements include the right (or the duty) of the corporation and/or the shareholders to purchase the shares in the event of the death or disability of the shareholder.
Establishing a Price
Establishing a price is always the most difficult and usually contentious issues facing shareholders in a closely held corporation. There is no magic price and while the book value may be appropriate for some corporations, a multiple net of earnings or appraisal may be the best method for others. A “Certified Value” can also be established at the corporation’s annual meeting, but the reality is that shareholders, more often than not, cannot agree on a value or simply neglect to determine a new value annually.
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