Five Shareholder Agreement Clauses Business Owners Overlook

Most small business shareholder agreements are adapted from an online template, or were put off with a plan to “finish it later” that never happened. The day the agreement is actually needed is the day the owners discover that the important parts are blank. These are the five clauses where I most often see problems in disputes.

1. The buy-sell clause: triggers and funding

The buy-sell clause decides who must, or may, buy whose shares, and when. It is the backbone of the agreement. It should cover death, disability, divorce, bankruptcy, termination of employment, transfers to outsiders and deadlock, and it should say whether a purchase is mandatory or merely an option. On a death, that difference decides whether the family is left holding shares they can never sell.

The part most often skipped is funding. An agreement that says “the company shall pay fair value within 30 days” means little if the company does not have the money. Life insurance and installment notes are common solutions, but the structure has tax consequences. In particular, the Supreme Court’s 2024 decision in Connelly v. United States can significantly increase the estate tax value of companies that use a company-owned insurance and redemption structure. Businesses using that structure should have their agreements reviewed.

2. Valuation: “fair value” alone says nothing

In a dispute, “the price shall be fair market value” means each side hires an expert, one says the company is worth $8 million, the other says $1.5 million, and the litigation lasts two years. An agreed price, a formula and an appraisal each have strengths and weaknesses. Whichever you choose, the agreement must state the valuation date and whether minority and marketability discounts apply. Those discounts alone can change the value of the same shares by more than 40%.

3. Non-competes and restrictive covenants: New York’s rules may surprise you

New York courts review non-competes for reasonableness and tend to strike an overbroad clause entirely rather than narrow it. Asking for too much can leave you with nothing. Restrictions tied to the sale of shares or a business, however, are judged under a noticeably more lenient standard, and how the clause is designed decides whether it holds up when needed. Non-solicitation, confidentiality and ownership of intellectual property should also be spelled out.

4. Death and succession: the hard part comes after

Without contrary terms, a deceased owner’s shares pass to their heirs. You could wake up in business with someone you have never met who cares only about distributions. The shareholders’ agreement, wills and trusts must all say the same thing. A surviving spouse’s statutory “elective share” under New York law can affect ownership, and S corporation shares left to the wrong kind of trust can terminate the company’s S status.

5. Breaking deadlock

Shotgun clauses, sealed bids, a neutral tie-breaker, mediation followed by arbitration: each mechanism has its uses and its traps. A shotgun clause looks fair, for example, but in practice strongly favors the owner with deeper pockets. The agreement should also say who runs the company while a deadlock is being resolved, and address drag-along and tag-along rights.

Attorney’s perspective: the test I apply

When I review a client’s shareholders’ agreement, I test it with three questions:

1. If one owner died tomorrow, who would buy the shares, within what time, with what money and at what price?
2. If the owners could never agree on a key issue, what would the company look like six months later?
3. If an owner left and opened an identical business next door, what could the company do?

If the agreement gives a clear answer to all three, it is sound. If any answer is “it depends” or “we’d work it out,” there is a dispute already built in, waiting for a trigger. Because my practice covers business formation, estate planning and shareholder litigation, I draft by walking each agreement through all three of those scenarios.

Talk to me

If your company has no shareholders’ agreement, or yours was adapted from a template years ago, call +1 718-218-5805 or schedule a consultation, and we can test your agreement against these three questions together.

This article is for general information only and is not legal advice. Reading it does not create an attorney-client relationship. For advice about your situation, please contact us.

Back to all articles