PROTECT YOUR INVESTMENT WITH A SHAREHOLDERS' AGREEMENT.

• Author: Sisca, Eileen R.
• Position: Brief Article

If your firm is organized as a professional corporation (PC), you can protect your individual interests and minimize the potential for conflict by creating a shareholders' agreement. A shareholders' agreement typically covers three major areas:

* The financial relationship among the shareholders.

* The process of decision-making within the firm.

* The mechanism for transferring and selling shares.

Firms organized as PCs must file articles of incorporation with the secretary of state that may deal with these issues; however, a separate shareholders' agreement can provide additional protection. Articles of incorporation, for the most part can be revised if shareholders who hold 51% of the shares vote to do so. But the standard shareholders' agreement can't be amended unless all the shareholders agree to it. In addition, while the articles of incorporation are a matter of public record, a shareholders' agreement is a private document.

To ensure the smooth running of your business, therefore, and to avoid possible litigation, consider drafting a shareholders' agreement to cover the various concerns of the shareholders.

Stock ownership

The initial investment. Generally, your percentage of ownership depends on your capital contributions--but not always. A shareholders' agreement should spell out just how much money each shareholder will contribute, as well as the number of shares he or she is to receive in return.

Additional investments. As a shareholder, you cannot be forced to contribute capital beyond what you agreed to initially. However, if other shareholders put additional money into the PC, they'll probably receive additional shares, which will dilute your voting interest. Conversely, if an owner, or group of owners, decides to buy additional stock in the PC and the firm's management is willing to sell it, you may not have the right to participate in the stock purchase unless it is specified in the articles of incorporation or the shareholders' agreement.

Leaving the firm

Termination of employment. If you quit or are fired, what happens to your stock? Does the PC have an option to buy it back, or have you lost your investment? These issues, as well as the price at which the stock will be repurchased, should be addressed in a shareholders' agreement. Without one, if you're terminated, you have no right to require that the PC buy you out and the PC has no right to buy you out.

Retirement. You might assume that the PC is obligated to buy you...