….keeping control by restricting the transfer of shares.
You, your best friend Jane and Jane’s cousin opened a store and online business selling luxury pet supplies under various brand names. You run the business through a New York corporation. Each of you has equal ownership in the corporation. Everything goes well, your products get mentioned on Oprah and you grow beyond your wildest dreams. One day, Jane and her cousin can’t take the every day stress of being entrepreneurs anymore and seek for an out. They find a buyer for all of their shares and sell their stake in the venture to Betty Buyer. Now you are in business with Betty Buyer whom you don’t know and don’t want to share ownership of a business with. What is worse, Betty Buyer now has a majority of the shares in your business and can outvote you on every decision. Obviously, this could be disastrous for you and your business.
An easy and painless way to prevent this scenario from unfolding is to adopt a shareholders agreement right at the beginning of your business venture. A shareholders agreement can put limitations on the right of shareholders to transfer their shares. Without such contractual restrictions, shareholders can just sell their shares to whomever they want.
However, rather than completely prohibiting any transfer of shares, many owners of a corporation opt to provide for a so called "right of first refusal."
Essentially, a right of first refusal provides that if an owner wants to sell her shares to an outsider, she first has to offer the shares to the corporation and the remaining shareholders. If the corporation and/or the shareholders do not want to buy the shares, she will be allowed to sell the shares to the outsider.
This simple idea can be customized further. For example, does the corporation have to buy the shares for the same price that was offered to the shareholder who wants to sell, or is there a predetermined price notwithstanding the offer? What is the predetermined price or how should it be determined? Does the corporation have to pay for the shares in one lump sum or over time in installments?
Despite what many lawyers may tell you, a shareholders agreement does not have to be long and complicated, so there is no real reason to avoid getting one in place early on.