Smart Answers

The Stockholder Who Wouldn't Sign


I'm not a business owner, but I own stock in a small private company. If I don't sign an amended stockholder's agreement that's presented to me, what are the consequences?

—C.L., Clearwater, Fla.

A: Your refusal to sign the amended agreement may certainly cause trouble if you're a majority shareholder. But if you're not a significant stockholder, or if you're bound by a "drag-along right," your signature might be irrelevant.

Let's back up a moment. Stockholder (or shareholder) agreements allow corporations to take any number of actions, such as restricting how shares are transferred, granting rights of first refusal on sales of interests, or defining the circumstances under which a shareholder will be bought out. "A well-crafted stockholder agreement allows the owners of a small corporation to maintain their control over the corporation, while not completely handcuffing a single shareholder who may wish to move on," says Stephanie Rahlfs, an attorney and editor of FindLaw.com.

Stockholder agreements are usually created early in the life of the corporation, she says, before significant disputes arise. Amendments can be major or minor—everything from procedural matters like a name or date change to major shifts such as the appointment of new directors.

Talk to the Owner

"If your approval would be required to gain such a majority, and you withhold that approval, then the amendment would simply not go into effect," Rahlfs says. On the other hand, if the amendment is approved by the majority of shareholders and the original agreement includes a drag-along right, you'd likely still be bound to it whether you sign it or not.

The drag-along right, which is a fairly typical clause, says you're subject to any amendments that a majority of shareholders approve, so long as you've been properly notified. "If you haven't been contacted by the business owner that there's a problem, there probably isn't one and the amendment could simply be procedural," says Brian Liu, co-founder and chairman of LegalZoom.com.

If you have a fundamental disagreement with this amendment, and you own a good portion of stock, it's in your best interest—and that of the business—to negotiate with the business owner and try to reach an agreement, says Hanna Hasl-Kelchner, a lawyer and the author of The Business Guide to Legal Literacy.

"A philosophical split over ownership or management detracts attention from the business, and that's not good for anyone. It makes sense to evaluate your priorities, and if you really can't come to some kind of compromise, you might be better off opting out," Hasl-Kelchner says.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Karen_klein
Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

Your Small Business Questions, Answered

Send us your questions on challenges you face in your business. Journalist Karen E. Klein will interview experts and distill their insights into answers.

(500 characters max)

We Almost Lost the Nasdaq
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus