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Make Sure You Have An Up-To-Date Shareholder Agreement Before It’s Too Late

No matter how many times I write about it, new clients keep coming in who have no signed shareholder agreement.  As regular readers of this site well know, a minority shareholder still has protection against wrongful acts based on the New Jersey shareholder oppression statute.  However, there are many ways that not having a shareholder agreement could cause a significant problem.

In one recent case, the fact that there was no shareholder agreement meant, of course, that there was no buy-sell agreement, and no provision in place for what would happen when one of the shareholders died.  No “key-man” life insurance policy was in place.  No steps at all were taken to deal with such an eventuality.  It was as if the shareholders never even contemplated that either of them could ever die.

When one of the 50/50 shareholders passed away, that shareholder’s wife became the new 50% owner.  She had no interest whatsoever in being involved with the company, but also did not want to sell her interest.  So, her son effectively controlled her shares, and my client was now in business with someone whom he had never before met, and who could barely read and write.  In fact, my client’s new de facto business partner bragged to customers that he never wrote a paper in college, and instead paid other students to write them for him.  My client, of course, was not convinced that this was the best way to impress a customer.

And the customers agreed, leaving in droves so they did not have to deal with the son.  My client petitioned the court for the appointment of a Provisional Director to break all ties, with the first issue being whether the new shareholder stand-in should be fired, or at least put in a position where he would not deal with customers.  We also sued the new widow/shareholder, claiming that saddling the company with the incompetent son constituted an act of shareholder oppression.

By now, any reader who sees their own company in these facts, even remotely, should have a headache, thinking about what may be in store if the situation is not rectified soon.  Yes, at the end of the day, the new shareholder wound up being bought out, and the son was never heard from again – at least not by my client.  But the time and money wasted, not to mention the aggravation, were almost incomprehensible.  I bit my tongue several times, but by the end of the case, when I got to know my client pretty well,  I finally had to say it – how much money do you think you saved by not paying a lawyer to draft a shareholder agreement?

He laughed, but it wasn’t funny.

Once a problem arises, it is far too late to enter into a shareholder agreement.  Have the document drafted now, before an issue rears its head.  And if you are starting a company, please do not skimp.  A few dollars now can prevent significant shareholder dispute litigation in the future.

If you have any questions about this post, or other related matter, please email me at