By J. Marc Ward and Grace Bogart | Fredrikson & Byron, P.A.
Shareholder agreements are an important piece of any bank’s succession plan. Without them they run the risk of in-fighting, loss of control, and lawsuits. Lack of succession planning too often has resulted in squabbles among family members over the ownership, control, and future of the family bank. Mothers have sued sons, sisters have sued brothers, and brothers have sued each other. The foregoing are all true cases involving family businesses that neglected to have shareholder agreements.
How does a shareholder agreement, also commonly referred to as a buy-sell agreement, work? The shareholders of a bank holding company (“BHC”) sign an agreement that restricts how the shares of the holding company can be sold or otherwise transferred. The agreement explains what happens to the stock in the event of death, disability, bankruptcy, and divorce of the shareholders. If employees own stock, the agreement should require the sale of their stock back to the company upon termination of employment.
How does a shareholder agreement, also commonly referred to as a buy-sell agreement, work? The shareholders of a bank holding company (“BHC”) sign an agreement that restricts how the shares of the holding company can be sold or otherwise transferred. The agreement explains what happens to the stock in the event of death, disability, bankruptcy, and divorce of the shareholders. If employees own stock, the agreement should require the sale of their stock back to the company upon termination of employment.
The general idea behind shareholder agreements is to provide a source of liquidity for the shareholders and keep the ownership of the BHC within the initial group of investors and their families. The owners agree not to sell their shares without first offering them to the other shareholders and then the company, or vice versa. Exceptions are made to allow for estate planning transfers to spouses or children. Shares would also become available to purchase in the event of a shareholder’s death (with carveouts for testamentary transfers to spouses and children), divorce or bankruptcy.
A shareholder agreement may in some cases save a corporation from dissolution. Minority shareholders in Iowa now have the ability to seek dissolution of a corporation in cases of “minority oppression”, i.e., if the reasonable investment expectations of the minority shareholder, in terms of dividends or the ability to sell shares back to the company at “fair value”, are not met. A shareholder agreement can provide a minority shareholder a mechanism by which he or she can exit the company and receive fair value for his or her shares, thus preventing minority oppression claims that threaten dissolution of the entire corporation.
Key issues for shareholder agreements are: (1) How should the stock be valued? (2) What events should trigger a sale? (3) Is the repurchase mandatory or optional? (4) What rights should the shareholders have in the event the BHC is sold? (5) Should there be a provision to force a sale if the shareholders can’t get along? These are all questions bank owners should consider when drafting a shareholder agreement.
For more information about CBI Affiliate member Fredrikson & Byron, P.A. visit www.fredlaw.com.
A shareholder agreement may in some cases save a corporation from dissolution. Minority shareholders in Iowa now have the ability to seek dissolution of a corporation in cases of “minority oppression”, i.e., if the reasonable investment expectations of the minority shareholder, in terms of dividends or the ability to sell shares back to the company at “fair value”, are not met. A shareholder agreement can provide a minority shareholder a mechanism by which he or she can exit the company and receive fair value for his or her shares, thus preventing minority oppression claims that threaten dissolution of the entire corporation.
Key issues for shareholder agreements are: (1) How should the stock be valued? (2) What events should trigger a sale? (3) Is the repurchase mandatory or optional? (4) What rights should the shareholders have in the event the BHC is sold? (5) Should there be a provision to force a sale if the shareholders can’t get along? These are all questions bank owners should consider when drafting a shareholder agreement.
For more information about CBI Affiliate member Fredrikson & Byron, P.A. visit www.fredlaw.com.
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