Incorporating your business as a Delaware corporation comes with lots of benefits. However, running a corporation the right way can require a lot of paperwork. There are many different types of corporate documents: from by-laws to Annual Reports. One of the most important documents that a Delaware corporation needs is a Stockholder Agreement.
A Delaware corporation needs a Stockholder Agreement from the start to avoid potentially costly legal issues. In this article, we cover exactly what a Stockholder Agreement is, why your Delaware corporation needs one, and how to get one.
What is a Corporation Stockholder Agreement?
A Stockholder Agreement is an important company document that describes the rules that each of a corporation’s stockholders need to follow. As owners of a corporation, stockholders have certain rights. However, stockholders should not be able to just transfer or sell their ownership in the company whenever they want and to whomever they want.
A Stockholder Agreement lays the ground rules that each stockholder must follow if they want to continue being an owner in the corporation. By setting up these rules from the start, the company can avoid costly legal disputes down the road caused by confusion or disagreements between stockholders.
How to Prepare a Delaware Corporation Stockholder Agreement.
A good Stockholder Agreement for a Delaware corporation should do a few things:
- Explain each owner’s rights and responsibilities:
A Stockholder Agreement should describe the rights that each stockholder has in the corporation. These rights include when, how and to whom they can transfer or sell their stock to. The Stockholder Agreement should also address what voting rights each stockholder may have in the corporation.
- Decide who stock can be given to:
A Stockholder Agreement should detail to whom the company can and cannot give its stock to.
Some stockholders in a corporation may want to keep certain people from gaining ownership or decision-making power in the company. A Stockholder Agreement can put rules in place aimed at avoiding disputes over stock transfers. For example, a Stockholder Agreement can state that a majority of the corporation’s stockholders need to vote to approve any transfer of stock from one person to another.
A Stockholder Agreement can keep unwanted individuals from joining the ownership and decision making ranks of a company. This can help prevent small disagreements between stockholders from blowing up into larger disputes.
- Determine how stock can be sold:
A Stockholder Agreement should clearly outline the steps someone should take to sell their stock in the company. The Agreement should specify the timing of stock sales, establish the selling price, and explain the procedure for carrying out a stock sale..
A corporation may want to put certain rules in place regarding selling stock to either:
- A.) Keep unwanted individuals from buying stock in the company; or,
- B.) Protect the price of the stock.
For example, some corporations might include some buy-back provisions, also called a “right of first refusal”, in the company’s Stockholder Agreement. A right of first refusal gives the company the opportunity to make an offer to buy back its own stock before the stock can be placed on the open market.
Does a Delaware Corporation Need a Stockholder Agreement?
A Delaware corporation should have a Stockholder Agreement if the company has more than one stockholder.
Delaware law does not require corporations to have a Stockholder Agreement. However, a Stockholder Agreement is still an important tool for avoiding all kinds of costly legal issues.
Other Requirements for Stockholder Agreements.
A Delaware corporation will need to include a note on the back of the company’s official stock certificates if the owners have a Stockholder Agreement with another. This tells other people who may want to buy the shares in the future that the agreement exists.
In the end, a Stockholder Agreement is more than just a piece of paper for a Delaware corporation. Stockholder Agreements are useful tools for managing the relationship between a corporation and its owners. If a Delaware corporation has more than one stockholder, then the company should have a well prepared Stockholder Agreement.
Remember, a good Stockholder Agreement is made with the company’s specific needs in mind. An incorporation service, like IncNow, can help prepare a complete Stockholder Agreement for a Delaware corporation.