March 19, 2013
I recently was introduced to a group of new clients who had agreed to put their money together to purchase and operate a corporation that would be selling and leasing parking and storage spaces in a large condominium complex. I knew in advance that the shareholders were widely dispersed and would rarely have face-to-face meetings. However, it soon became clear that they didn’t know each other very well and that there was a bit of suspicion when it came to making decisions about the corporation and its business.
Since a continuous stream of sales and leases of the spaces would be needed in order to make the venture profitable, and pay off the financing that had been agreed to by the previous owner of the corporation, we needed to be sure that someone would have the authority to act quickly in order to avoid getting bogged down with the need to obtain consents from everyone whenever anything needed to be done. It’s a problem that you’ll inevitably have time and time again in your practice as a business counselor and you’ll need to have ideas ready for your clients to consider.
The answer in this case was a carefully drafted shareholders’ agreement that designated two of the five shareholders, each of whom lived near to the condominiums, to negotiate and sign contracts relating to the spaces that included terms that fell within general parameters agreed upon by all of the shareholders in advance. One of the local shareholders could act on her own, recognizing that the other might be out of town or otherwise unavailable, and both shareholders were required to provide regular reports to all of the shareholders about the terms of contracts they have signed. All of the shareholders would need to act together to review and update the “agreed terms” on a regular basis.
If you are looking to learn more about how to manage the sensitive balance among shareholders of a closely held corporation, see our program on The Importance of a Well-Crafted Shareholders’ Agreement and the various forms of model agreements available with that program.