BEYOND THE BAR
BECOMING A BUSINESS COUNSELOR:
A PATH FOR NEW BUSINESS ASSOCIATES
SHAREHOLDERS' AGREEMENTS
Alan Gutterman
Principal, Gutterman Law & Business
2012
BEYOND THE BAR
PRACTICE TOOLS:
SHAREHOLDERS' AGREEMENT—MASTER FORM WITH
COMMENTARY
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VOTING AGREEMENT—MASTER FORM WITH COMMENTARY
PAGE 21
VOTING TRUST AGREEMENT—MASTER FORM WITH
COMMENTARY
PAGE 41
IRREVOCABLE PROXY
PAGE 51
STOCKHOLDERS' AGREEMENT FOR MANAGEMENT AND
INVESTOR GROUPS
PAGE 52
Reprinted from “Business Transactions Solutions” ©Thomson Reuters 2012, “Business Business
Counselor's Law & Compliance Practice Manual” ©Thomson Reuters 2012 and “Organizational
Management and Administration: A Guide for Managers and Professionals” ©Thomson Reuters
2011. To purchase any of these products please visit http://store.westlaw.com or call 1-800-328-9352
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SHAREHOLDERS' AGREEMENT — MASTER FORM WITH
COMMENTARY
Source: Gutterman, Business Transaction Solutions (BUSTRANSOL §11:35)
THIS SHAREHOLDERS' AGREEMENT is made [date], between [name of shareholder], of [address],
[name of shareholder], of [address], and [name of shareholder], of [address], here sometimes referred to
singularly as shareholder, and collectively as shareholders, and [name of corporation], a corporation
organized under the laws of the State of [state], with its principal office located at [address], here referred
to as corporation.
Recitals
A. Shareholders constitute all of the shareholders of corporation.
B. It is the desire and the intention of the shareholders to establish stock rights in the corporation as
among themselves; to provide for the election of directors and officers of the corporation and other
matters relating to the management of the corporation; to arrange for their employment by the
corporation; to impose certain restrictions on the transfer of shares in the corporation and to establish
various options and obligations for the sale and purchase of such shares on the occurrence of various
events; and generally provide for the relationships, duties, obligations, and basis of their association
so as to successfully perpetrate such an association.
In consideration of the premises and the mutual agreements contained in this agreement, made by each
of the parties to the other, it is mutually agreed as follows:
1. Stock Purchases
1.1. Capitalization
Each of the shareholders has purchased [number] shares of the common stock of corporation for the
consideration of [amount] per share. Certificates for fully paid and nonassessable stock have been or
shall be issued to each shareholder accordingly.
1.2. Preemptive Rights
No shares of stock shall be issued unless each shareholder is simultaneously given the preemptive right
to purchase shares of stock in corporation as shall be provided for pursuant to the laws of the State of
[state] as though the [articles or certificate] of incorporation contained a provision for such preemptive
rights.
1.3. Changes in Capital Structure
In the event that the shares of stock of corporation are changed to or exchanged for a different number or
kind of shares of stock, or other securities, whether by reason of merger, consolidation, recapitalization,
reclassification, split-up, combination of shares, or otherwise, or exchanged for shares of another
corporation, or if the number of issued and outstanding shares of stock is increased through the payment
of a stock dividend, then there shall be substituted for or added to the stock subject to this agreement,
whether issued and outstanding, or reserved for issuance, the number and kind of shares of stock or
other securities into which the stock of corporation shall have been so changed, or for which the stock will
be exchanged, or to which the stock shall be entitled, as the case may be, and the price of the shares to
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be purchased by each shareholder shall be approximately adjusted to reflect the events specified in this
section.
2. Directors; Officers; General Operations
2.1. Directors and Officers
Each of the shareholders agrees that it will vote its shares, to the extent legally possible, vote as a
director to accomplish the following:
(a) The board of directors of corporation will consist of [number] persons, and each of the shareholders
shall be elected as a director.
The board of directors shall perform such functions for and on behalf of the corporation, as are not
otherwise delegated to some other individual(s) or entity(ies) under either the provisions of this
agreement, or by the operation of law. If the board of directors should ever reach an impasse and be
unable to take any action because of the lack of a necessary consensus of the members thereof, then
an interim director (“Interim Director”) shall be designated by the unanimous written consent of the
shareholders, solely for the purpose of resolving the particular impasse. If the Interim Director is ever
appointed under the provisions of this Section, then the Interim Director shall be indemnified and held
harmless by the corporation against any claim, loss, damage, liability or cost asserted against or
incurred by the Interim Director that is related to any action taken by such individual in the capacity of
Interim Director to the corporation, unless such claim, loss, damage, liability or cost is determined by
a competent court of law having proper jurisdiction, to be the direct result of either a fraud committed
by, or the gross negligence of, the Interim Director.
(b) Each of the shareholders will be elected to the office designated after its name below:
Name
Office
[name]
President
[name]
Vice President
[name]
Vice President
[name]
Secretary
[name]
Treasurer
(c) Except as otherwise required by this agreement, or by operation of law, or the bylaws of the
corporation, no meeting of either the shareholders, or the board of directors, needs to be held at any
time.
2.1. Option: Specification of Officers' Duties
Subject to the control of the board of directors, the officers of the corporation shall have the following
duties and responsibilities:
(a) The President shall be the general manager and chief executive officer of the Corporation and shall
preside at all meetings of shareholders and at all meetings of the Board. The President shall, subject
to the control of the Board, have general supervision of the affairs of the Corporation, shall sign or
countersign or authorize another officer to sign all certificates, contracts, and other instruments of the
Corporation as authorized by the Board, shall make reports to the Board and shareholders, and shall
perform all such other duties as are incident to that office or are properly required by the Board.
(b) In the absence of the President, or in the event of the President's death, disability, or refusal to act,
the Vice President or, in the event there be more than one Vice President, the Vice Presidents in the
order designated at the time of their selection, or in the absence of any designation, then in the order
of their selection, shall perform the duties of the President, and when so acting, shall have all the
powers and be subject to all restrictions upon the President. Each Vice President shall have those
powers and discharge those duties as may be assigned from time to time by the chief executive
officer or by the Board.
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(c) The Secretary shall see that notices for all meetings are given in accordance with the provisions of
this agreement, the bylaws of the Corporation, and as required by the [state] Corporations Code, shall
keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make
those reports and perform those other duties as are incident to that office, or are properly required by
the President or by the Board. The Assistant Secretary or the Assistant Secretaries who may be
appointed by the Board, in the order of their seniority, shall, in the absence or disability of the
Secretary, or in the event of the Secretary's refusal to act, perform the duties and exercise the powers
and discharge those duties as may be assigned from time to time by the chief executive officer or by
the Board.
(d) The Treasurer shall serve as the chief financial officer of the Corporation and shall have custody of all
moneys and securities of the Corporation and shall keep regular books of account. The Treasurer
shall disburse the funds of the Corporation in payment of the just demands against the Corporation,
or as may be ordered by the Board, taking proper vouchers for those disbursements, and shall render
to the Board from time to time as may be required of that officer an account of all transactions as
Treasurer and of the financial condition of the Corporation. The Treasurer shall perform all duties
incident to the office or which are properly required by the chief executive officer or by the Board. The
Assistant or Assistants to the Treasurer who may be appointed by the Board, in the order of their
seniority, shall, in the absence or disability of the Treasurer, or in the event of the Treasurer's refusal
to act, perform the duties and exercise the powers of the Treasurer, and shall have those powers and
discharge those duties as may be assigned from time to time by the President or by the Board.
2.2. Corporate Funds
The bank account of corporation will be maintained at [name of bank], in [city], [state]. Further or different
banking facilities may be selected and arranged for from time to time by the board of directors. No check
or draft may be drawn for any obligation in excess of [amount] unless such check or draft is signed by two
officers.
2.3. Auditors
Until their successors are selected by the board of directors, [name of accounting firm] shall be the
accountants and auditors of corporation. As soon as practical after the end of each fiscal year, the board
of directors shall request corporation's independent accountants to transmit to it a report on corporation's
financial statements, after examination of such statements by them. The examination will be conducted,
insofar as practicable, in accordance with generally accepted auditing standards, with a view toward the
rendering of an unqualified report. Copies of all reports of the accountants and auditors of corporation
shall be available to each shareholder as soon as practical after its publication.
2.4. Restrictions on Management
Except as otherwise provided herein, or by operation of law, no individual who, or entity which, manages
and directs the operation of the business and affairs of the corporation under the provisions of this
agreement, shall have any authority to take any of the actions set forth hereafter in this section, without
the prior written unanimous consent of the shareholders:
(a) Issue or sell on behalf of the corporation any additional shares;
(b) Sell any asset of the corporation which has a fair market value in excess of [amount], as determined
at the time of such sale;
(c) Enter into an arrangement which subjects the corporation to any single obligation, other than an
obligation to pay a salary to an employee of the corporation, which is in excess of [amount], in the
aggregate, during any single calendar month;
(d) Make any payment(s) for or on behalf of the corporation to any person or entity, other than payments
of a salary to an employee of the corporation, which is (are) in excess of [amount], in the aggregate,
during any single calendar month;
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(e) Enter into an obligation to pay a salary to an employee of the corporation which is in excess of an
amount to be determined by the shareholders;
(f) Cause the corporation to engage in any type of business other than the [type of business] business;
or
(g) Engage in any activity, for or on behalf of the corporation, which is either unlawful, or in specific
contradiction with the terms of this agreement.
2.5. Indemnification
The Corporation agrees to indemnify and hold each of the officers and members of the Corporation's
board of directors (“Board of Directors”) harmless from and against any claim, loss, damage, liability or
cost asserted against or incurred by such individual which is attributable to the services rendered in that
capacity, except for any such claim, loss, damage, liability or cost determined by a competent court of law
having proper jurisdiction, to be the direct result of an act by the individual, that is: (i) unlawful; or (ii)
specifically outside the scope of such officer's or director's corporate authority.
2.5. Alternative: Detailed Procedures of Indemnification
(a) The corporation shall, to the extent legally permissible, indemnify each of the directors and officers of
the corporation against all liabilities and expenses, including amounts paid in satisfaction of
judgments, in compromise, or as fines and penalties, and counsel fees, reasonably incurred by such
director or officer in connection with the defense or disposition of any action, suit, or other proceeding,
whether civil or criminal, in which such director or officer may be involved or with which such director
or officer may be threatened, while in office or thereafter, by reason of such director or officer being or
having been such a director or officer of the corporation or by reason of such director or officer
serving or having served at the request of the corporation as a director, officer, or trustee of a wholly
owned subsidiary of the corporation or having served in any capacity with respect to any employee
benefit plan maintained by the corporation or any wholly owned subsidiary of the corporation, except
with respect to any matter as to which such director or officer shall have been adjudicated in any
proceeding not to have acted in good faith in the reasonable belief that his or her action was in the
best interest of the corporation or of such subsidiary or, to the extent that such matter relates to
service with respect to any such employee benefit plan, in the best interest of the participants or
beneficiaries of such employee benefit plan; provided, however, that as to any matter disposed of by
a compromise payment by such director or officer, pursuant to a consent decree or otherwise, no
indemnification either for such payment or for any other expenses shall be provided unless such
indemnification shall be ordered by a court or unless such compromise shall be approved as in the
best interest of the corporation, after notice that it involves such indemnification: (1) by a disinterested
majority of the directors of the corporation then in office; or (2) by a majority of the disinterested
directors of the corporation then in office, provided that there has been obtained an opinion in writing
of independent legal counsel to the effect that such director or officer appears to have acted in good
faith in the reasonable belief that his or her action was in the best interest of the corporation; or (3) by
the holders of a majority of the outstanding stock at the time entitled to vote for directors, voting as a
single class, exclusive of any stock owned by any interested director or officer.
(b) Expenses, including counsel fees, reasonably incurred by any director or officer of the corporation in
connection with the defense or disposition of any such action, suit, or other proceeding shall be paid
from time to time by the corporation in advance of the final disposition thereof on receipt of an
undertaking by such director or officer to repay the amounts so paid to the corporation if it is
ultimately determined that indemnification for such expense is not authorized under this paragraph.
(c) If in an action, suit, or proceeding brought by or in the right of the corporation, a director of the
corporation is held not liable for monetary damages, whether because that director is relieved of
personal liability under the provisions of the [articles/certificate] of incorporation of the corporation or
otherwise, that director shall be deemed to have met the standard of conduct set forth in (a) above
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and shall be entitled to indemnification for expenses reasonably incurred in the defense of such
action, suit, or proceeding.
(d) The indemnification by the corporation provided for in this agreement shall not be exclusive of or
affect any other rights to which any director or officer may be entitled.
2.6. Dividends
Subject to the limitations contained in the [state] Corporations Code, dividends shall be paid to the
shareholders of the corporation in such amounts, and at such times, as may be determined by the board
of directors.
3. Records and Reports
Any individual who, or entity which, manages and directs the operation of the business and affairs of the
corporation under this Agreement, shall cause the corporation to maintain the books, records and other
documents as required by Section [section number] of the [state] Corporations Code; such individual or
entity shall cause the corporation to furnish to each of the shareholders an annual report such as referred
to in Section [section number] of the [state] Corporations Code, which report need not be audited.
3. Option: Contents of Financial Statements Included in Annual Report
On any annual report sent to shareholders, the income statement shall disclose the amount of income or
loss to the corporation during the fiscal year, in such categories as may be appropriate to the business of
the corporation, and all additions thereto and deductions therefrom. The statement shall set forth in
particular the amounts of depreciation, depletion, interest, and amortization accrued during the fiscal year,
and shall contain in footnotes the following information:
(a) The nature and degree of ownership by the corporation of any subsidiary corporations the income of
which has been consolidated with the income of the corporation for reporting purposes.
(b) The amount and nature of any income of subsidiary corporations that has not been consolidated with
the income of the corporation for reporting purposes.
(c) Any extraordinary income or charges, whether or not included in operating income or expenses.
The balance sheet shall fairly and accurately reflect the assets and liabilities of the corporation as of the
end of the fiscal year, in such categories as may be appropriate to the business of the corporation, and
shall plainly state the nature and degree of ownership by the corporation of any subsidiary corporations
the assets of which have been consolidated with the assets of the corporation for reporting purposes.
Additionally, the balance sheet shall set forth all accrued but unpaid liabilities, and amounts set aside as
reserves for bad debts, depreciation, depletion, amortization of long term debt, and any sinking fund
established to retire any class or classes of stock. Portions of long term debt payable within the coming
fiscal year shall be carried as current liabilities. Additionally, there shall be set forth in notes to the balance
sheet, the following:
(a) The aggregate dollar amount payable by the corporation and any consolidated subsidiaries for the
coming fiscal year under any and all leases of real and personal property currently in force.
(b) The manner in which any assets have been valued, if other than at cost.
(c) Any controversies or legal proceedings pending against the corporation and any consolidated
subsidiaries that may tend to materially affect the financial position of the corporation or any
consolidated subsidiary.
In addition to the items specified above, the annual report shall also describe briefly:
(a) Any transaction, excluding compensation of officers and directors, during the previous fiscal year
involving an amount in excess of [amount], other than contracts let at competitive bid or services
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rendered at prices regulated by law, to which the corporation or its parent or subsidiary was a party
and in which any director or officer of the corporation or of a subsidiary or any holder of more than
[number] percent of the outstanding voting shares of the corporation had a direct or indirect material
interest, naming the person and stating the person's relationship to the corporation, the nature of the
person's interest in the transaction and, where practicable, the amount of the interest. This report
need not be made in cases where the transactions have been approved by the shareholders in the
manner provided by law.
(b) The amount and circumstances of any indemnification or advances aggregating more than [amount]
paid during the fiscal year to any officer or director of the corporation pursuant to the provisions of
these bylaws for indemnification. A report need not be made in the case of indemnification approved
by the shareholders as provided by law.
4. Employment
4.1. Employment of Shareholders
(a) Corporation hereby employs each of the shareholders in such capacities and to perform such duties
as will be assigned to the shareholder from time to time by the board of directors acting pursuant to
corporation's bylaws and under the general direction of the board of directors; provided, however, that
[name of shareholder] shall be in over-all charge of [specify particular aspect of corporate activity].
(b) Each shareholder agrees to be so employed by corporation, and each further agrees to serve as a
director and officer of corporation. Each shareholder agrees that the compensation to be paid to each
of them shall at all times be equal.
(c) For all of the services to be rendered by each of the shareholders, corporation shall pay to each of
them an initial salary of [amount] per [time period], and such fringe benefits as the board of directors
shall determine. Such compensation will continue until such time as the board of directors shall
otherwise determine.
4.2. Restrictions on Competitive Activities
Each of the shareholders agrees to devote its best efforts and entire time and attention to the business of
corporation, and that it shall not directly or indirectly engage in any other business, either as a proprietor,
partner, shareholder, director, officer, creditor, employee, or in any other capacity whatsoever. Nothing in
this paragraph shall restrict any shareholder from: (a) owning less than a controlling interest in any
securities that are traded over the counter or on a national stock exchange, or (b) acting as a consultant
to a person who or company that does not directly or indirectly compete with corporation, and provided
further that such consultancy does not conflict or interfere with that shareholder's ability to provide
services on a full-time basis to corporation. If any shareholder undertakes such a consultancy, the
shareholder must keep the other shareholders of corporation informed of the name of the person, firm, or
corporation the shareholder is consulting to and the general nature of the consultancy.
4.3. Conflicting Obligations
Each of the shareholders warrants that it is not limited or restricted in any way from entering into the
business contemplated by the shareholders and each agrees to hold each of the other shareholders and
corporation harmless in the event of any suit in which the moving party or parties allege that the
shareholder's relationships or activities with corporation violate any agreement or duty at common law not
to engage in corporation's business.
4.4. Health and Life Insurance
(a) Corporation shall have the right at any time during the term of this agreement, or any extension or
renewal thereof, to apply in its own name, for life, health, accident, or other insurance covering [name
of shareholder], and [name of shareholder] agrees that corporation may do so and may take out such
insurance for any sum corporation may deem necessary to protect its interests under this agreement.
(b) Corporation will pay all premiums on insurance policies taken out pursuant to this Paragraph 4.4.
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(c) Corporation will be the sole owner of the policies of insurance issued to it, and [name of shareholder]
shall have no right, title, or interest in and to such insurance, but [name of shareholder] agrees
nevertheless to assist corporation in procuring such insurance by submitting to the usual and
customary medical and other examinations and by executing such applications and instruments as
may be required by such insurance company or companies.
(d) On termination of [name of shareholder]'s services to and relationship with corporation, for any
reason other than by incapacity, with or without cause, [name of shareholder] shall have the right to
purchase any or all of such insurance policies covering [name of shareholder] for a sum equal to the
then cash surrender value of such policy or policies plus the pro-rated value of the unearned
premiums.
4.5. Disability Insurance
(a) Corporation will purchase and maintain in force disability insurance covering the shareholders, which
shall commence payment to any of them who is wholly or partially disabled (as defined in the
insurance policy) after such disability has existed for [number] days.
(b) Salaries and all rights to fringe benefits shall continue while the shareholder is disabled and receiving
payments under any such insurance policy until a purchase of stock shall take place pursuant to
Section Five, Paragraph 5.4, except that the sum of any disability benefits under any disability
insurance provided by corporation shall be subtracted from the salary paid to the shareholder while
the shareholder is disabled. This section is for the benefit of the shareholder and corporation and is
not intended to limit any disability benefits that may be payable to the shareholder after the end of the
disability period defined in Section Five, Paragraph 5.4 or after a purchase of the shareholder's stock
pursuant to that section and paragraph.
4.6. Protection of Confidential Information
Each shareholder agrees that he or she will maintain in confidence and will not disclose or use, either
during or after his or her term of employment with the corporation without the prior express written
consent of the corporation, any proprietary or confidential information or know-how belonging to the
corporation (“Confidential Information”), whether or not it is in written or permanent form, except to the
extent required to perform his or her duties on behalf of the corporation as an employee. Such
Confidential Information includes, but is not limited to, technical and business information relating to the
corporation's inventions or products, research and development, production processes, manufacturing
and engineering processes, machines and equipment, finances, customers, marketing, and production
and future business plans. Upon termination of his or her employment, each shareholder agrees to deliver
to the corporation all written and tangible material in his or her possession incorporating the Confidential
Information or otherwise relating to the corporation's business. These obligations with respect to
Confidential Information extend to information belonging to customers and suppliers of the corporation
who may have disclosed such information to the shareholder in the course of business.
4.7. Option: Assignment of Inventions
For valuable consideration, the receipt of which is hereby acknowledged, each of the shareholders does
hereby transfer all of his right, title and interest to the corporation in ideas and proprietary data, if any, to
certain technology, inventions and devices, described in [type of document] as products that have been,
or will be, developed, manufactured, or sold by the corporation, including, but not limited to, all right, title
and interest in any data or other proprietary information or know-how related, necessary or useful to the
design, engineering, development, manufacture, sale of said products, or to perfecting patent or
trademark rights in and to said products, or improvements or modifications thereon. Each of the
shareholders covenants with the corporation that he will prepare detailed drawings, plans and
specifications of the said personal property and such other materials as are reasonably necessary for the
purposes of ascertaining the potential patentability of said personal property, and he will cooperate fully
with the corporation, including any additional research or the preparation of any additional materials or
modifications necessary in patent searches, examinations, and applications in this regard if the
corporation decides to apply for patents upon any of the said personal property.
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5. Buy-Sell Provisions
5.1. Restrictions on Transfers
Each shareholder agrees that it will not in any manner encumber or dispose of all or any part of the stock
the shareholder is purchasing pursuant to this agreement or may subsequently acquire until such
shareholder complies with the terms of this Section Five.
5.2. Right of First Offer
(a) Commencing as of the sale of this agreement, any shareholder desiring to encumber or dispose of all
or any part of the shareholder's stock in corporation, shall first offer in writing to sell all, and not a part,
of such stock to corporation. The offering shareholder must mail a copy of the offer to each of the
other shareholders.
(b) Corporation may, within [number] days after receipt of the offer, accept it by mailing written notice of
acceptance to the offering shareholder. If corporation does not accept the offer by mailing written
notice of acceptance to the offering shareholder, then the other shareholders will within [number]
days after receipt of the offer, have the option to accept such offer by mailing written notice of
acceptance to the offering shareholder. If the other shareholders do not accept the offer, the offering
shareholder shall be free to sell the shares on the open market.
5.3. Right To Cause Repurchase of Shares
[Name of shareholder] may at any time require corporation to redeem all and not a part of the stock of any
shareholder (other than stock owned by [name of shareholder]), and require any shareholder to sell all
and not a part of its stock to the corporation. If corporation does not have the surplus available to make to
the purchase or is not otherwise financially able to do so, [name of shareholder] may call on any
shareholder to sell all and not a part of its stock to [name of shareholder] or its designee.
5.4. Disability
(a) In the event any shareholder is unable to perform services as an employee of corporation by reason
of illness or incapacity for a period of more than [number] consecutive days prior to [date] in any year,
or for a period of [number] consecutive days from [date] to [date] in any year, or thereafter for more
than [number] consecutive months (all such periods herein referred to as the “disability period”), on
the completion of the disability period, such incapacity shall be deemed an automatic offer by such
shareholder to sell all its stock in corporation, pursuant to Paragraph 5.2 of this Section Five.
(b) At any time after the end of the disability period and before the shareholder returns to work on a fulltime basis, corporation may, if it so elects, declare such shareholder's employment terminated on
[number] days' notice given according to the provisions of this agreement. If corporation terminates
such shareholder's employment, corporation shall be obliged to accept the offer to sell such
shareholder's stock deemed to have been made pursuant to Paragraph 5.2 of this Section Five.
5.5. Termination of Employment
(a) The termination by a shareholder of its employment will be deemed an offer to sell its stock pursuant
to Paragraph 5.2 of this Section Five, and to resign as an officer and director of corporation. An offer
to sell stock by a shareholder will be deemed an offer by such shareholder to terminate its
employment and resign as an officer and director of corporation.
(b) Such termination of employment and resignation as an officer and director will be effective on
payment to such shareholder of the first payment for the shareholder's stock and payment in full of all
salary due the shareholder, or if such offer is not accepted by corporation or any other shareholder,
then the shareholder's employment, officership, and directorship shall terminate either (1) [number]
days after the date of the shareholder's offer to sell, or (2) on the date all salary due the shareholder
shall have been paid to the shareholder, whichever occurs later.
5.6. Death
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In the event of the death of a shareholder, the shareholder's estate will be deemed to have offered, and
corporation shall purchase, all the stock of corporation owned any such shareholder.
5.7. Certain Definitions
(a) The provisions of Paragraphs 5.8 through 5.13 will apply to determine the purchase price the
purchaser must pay for any stock purchased pursuant to Paragraphs 5.1 through 5.6 hereof, and will
provide the terms of payment for the stock.
(b) “Net sales” means gross sales less trade discounts and allowances and merchandise returns.
(c) “Pay-out period” means the [number]-year period from and after the date on which a shareholder sells
its stock under this agreement.
(d) “Applicable trademarks” means all trade names, trademarks, and copyrights of corporation, whether
registered or unregistered, owned by it or used by it on or any time or from time to time before the
“valuation date” (as defined below).
5.8. Purchase Price
(a) The purchase price of stock purchased and sold under this agreement shall be the sum of (1) the
book value of the stock as reflected on the financial statements of corporation as of the last day of the
month (the “valuation date”) in which the offer to sell (or call, with respect to a transaction under
Paragraph 5.3) was made, plus (2) the good will payments provided for below. The purchase price
shall be determined in accordance with the provisions of this paragraph by the independent
accountants servicing corporation at the time such a determination is required. It is expressly agreed
that the determination by such independent accountants, when made, certified, and delivered, shall
be binding on all of the parties to this agreement, provided that such accountants shall have used
generally accepted accounting principles applied on a consistent basis and provided further, that such
accountants shall have given proper effect to all of the provisions of this Paragraph 5.8.
(b) “Book value” shall be the tangible book value without good will except good will created by reason of
an acquisition above the book value of the acquiring entity. The parties agree that a physical
inventory, observed by the accountants, will be taken of all merchandise and supplies at the valuation
date and that date will be the date as of which the financial statement shall be presented for purposes
of determination of book value.
(c) The purchaser will pay to the seller (in addition to the payments made on account of the book value
for the acquired shares) an amount attributable to the good will of the shares, equal to (1) [number]
percent of the net sales of corporation from the sale of all products manufactured or distributed by it
under any of the applicable trademarks during the pay-out period, plus (2) [number] percent of all net
royalties, licensing receipts, and similar moneys received by corporation during the pay-out period
from licenses or grants of similar rights to use or market products under any of the applicable
trademarks, plus (3) a percentage (determined as provided below) of all considerations received from
the sale or other disposition during the pay-out period of any applicable trademarks or any rights or
interests therein or thereto (other than those covered by Clause (2) hereof); the percentage will be an
amount equal to [number] percent times the number of years remaining in the pay-out period, as of
the date of such sale or other disposition. Clauses (1) and (2) hereof are subject to the proviso that, if
the stock of any shareholder other than is purchased under this agreement on or before [date], the
annual good-will payments under Clauses (1) and (2) will be deemed to be one-third of the amount
provided for in such clauses, and if such stock is purchased after [date], such payments will be twothirds of the amount otherwise provided for in Clauses (1) and (2).
(d) During a pay-out period, corporation will not sell or otherwise dispose of any applicable trademark
except in an arm's length transaction, to a purchaser unaffiliated, directly or indirectly, with
corporation or any of the remaining shareholders, and for the fair market value of the applicable
trademark so sold.
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5.9. Involuntary Transfers
In the event of any sale, transfer, or disposition of any stock subject to this agreement in any manner not
mentioned above, whether voluntary or involuntary, including, but not limited to, sale, transfer, or
disposition under judicial order, legal process, attachment, enforcement of a pledge, trust, or
encumbrance, or sale under any of them, the purchaser or one to whom the stock passes or
encumbrance, or sale under any of them, the purchaser or one to whom the stock passes or is disposed
of shall offer in writing to sell to corporation and the shareholders all of such stock, within [number] days
after such sale, transfer, or disposition on the terms and conditions set forth in Paragraph 5.2 of this
agreement, provided, however, that the purchase price of such stock value shall be the lesser of the price
paid by the offeror or the book value as determined pursuant to Paragraph 5.8 this agreement as of the
last day of the month preceding such offer.
5.10. Transfers in Violation of Agreement
Any sale, transfer, disposition, or encumbrance of any stock subject to this agreement made in violation to
the terms and conditions of this agreement shall be absolutely null and void, and the stock shall not be
transferred or recognized by corporation.
5.11. Corporate Actions
If at any time corporation is required to make any payment on the purchase of stock by the terms of this
agreement, and its surplus is then insufficient for such purpose, then:
(a) The entire available surplus must be used to purchase as many shares of such stock as may be
purchased with such surplus amount; and
(b) Corporation must, as rapidly as it acquires sufficient surplus, purchase any shares not purchased to
subparagraph (a), above.
5.12. Terms of Payment
If at any time any of the parties make any purchase of stock pursuant to the terms of this agreement, the
purchase price will be paid as follows:
(a) If the book value of the stock to be purchased is [amount] or less, it must be paid within [number]
days of the determination of book value.
(b) If the book value of the stock to be purchased is in excess of [amount], it must be paid by an initial
installment of [amount] to be paid within [number] days of the determination of book value, with the
balance payable in [number] equal monthly installments, commencing [number] months after the
determination of book value.
(c) The installments provided for in Subparagraph (b), above, must be evidenced by a series of
nonnegotiable promissory notes bearing interest at the rate then paid on [specify type of investment
or other comparable rate model]. The notes must provide for the acceleration of the due date of all
unpaid notes in the series on default in the payment of any one note and shall give the maker the
option of prepayment, either in whole or in part, at any time. In any case, where the notes are to be
made by corporation, the remaining shareholders must endorse the notes, subject to the following
provision, which must be set forth on the back of each note:
“FOR VALUE RECEIVED, the undersigned and each of them hereby forever waives
presentment, demand, protest, notice of protest, and notice of dishonor of the within note and the
undersigned and each of them guarantees the payment of the note at maturity and consents
without notice to any and all extensions of time or terms of payment made by the holder of the
note.” In the event any shareholder fails or refuses to endorse each note, as prescribed above,
then corporation and the other shareholders may elect to treat such refusal as an offer to sell all
of the stock in corporation owner by such refusing shareholder in accordance with the terms of
this agreement.
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(d)
(1) The payment for goodwill will be determined and paid within [number] days of the end of each
fiscal year of corporation commencing with the fiscal year in which the date of purchase occurs. A
purchase will be deemed to have occurred on payment to the seller of the first payment for
seller's stock and payment in full of all salary due to the seller, and the shares of stock being
purchased will be delivered on such date.
(2) Corporation will maintain separate invoices and books of account for each item involved in the
determination of payments for good will. These books of account will be complete and accurate in
accordance with generally accepted accounting practice consistently applied so as to make the
amount to become due and payable to the seller clearly ascertainable. The seller (and/or the
seller's representative) may have reasonable access to, and the right to inspect such books,
records, and accounts as may be reasonably necessary to verify the accuracy of any payment
made or required to be made for good will.
5.13. Security Interest
(a) Pending the payment of the full purchase price, the stock, after it has been transferred to the
purchaser(s), must be endorsed in blank by the purchaser(s) and deposited with the seller, as
security for the payment thereof. Any securities issued on or with respect to the pledged stock,
whether by way of dividend, spin-off, stock split, recapitalization, or otherwise, will be subject to the
pledge provided for herein and will be immediately delivered to the pledgee endorsed in blank to be
held by the pledgee pursuant to the same terms and conditions as the securities already on deposit.
In the event of a default by the purchaser(s) in the payment of any installment of such purchase price,
and if such default continues for a period of [number] days, the stock of such defaulting purchaser(s)
must, on written demand of the seller, be sold to any other person, either at public or private sale, on
[number] days' notice to such purchaser(s). In addition, the secured party will have all rights provided
for by the [state] Uniform Commercial Code. The proceeds of the sale will be paid over to the seller
and applied on account of the balance of the purchase price then due from the defaulting
purchaser(s), and such purchaser(s) will be liable for any deficiency.
(b) Until default is made in the payment of the purchase price of the stock, the right to vote the stock and
to receive cash dividends thereunder will be in the purchaser(s) of the stock, and each of the parties
agrees that such purchaser(s) or legal representative, may sign any proxy, power of attorney, or other
papers that may be necessary in connection with that right. After a default not cured within [number]
days as provided for herein, the stock will be transferred on the books and records of corporation in
and to the name of the secured party, who will thereafter have the right to vote the stock and to
receive all dividends and distributions thereon.
6. Stock Certificate Legend
Each shareholder agrees that it will hold its shares subject to the terms of this agreement, and will not
sell, transfer, pledge, assign, encumber, or otherwise dispose of the shares in any manner except as
provided by the terms of this agreement. Each shareholder agrees that any certificate issued to the
shareholder pursuant to this agreement will be endorsed with the following legend:
Sale, transfer, pledge, assignment, or encumbrance of the securities represented by this certificate is
subject to the terms of a shareholders' agreement dated [date], which may be examined at the principal
office of the corporation.
7. Notices
All notices pursuant to this agreement must be given by registered or certified mail addressed to the party
receiving notice at the address set forth for the party in this agreement or such other address as may be
specified by notice in writing given in the same manner by any party or parties to all signatories.
8. Parties Bound; Further Acts
This agreement is binding on the parties hereto, their heirs, executors, administrators, successors, and
assigns. The parties agree for themselves, and their heirs, executors, administrators, successors, and
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assigns, to execute any instruments and to perform any acts that may be necessary or proper to carry out
the purposes of this agreement, but the failure to execute such instruments will not affect the rights of any
party hereto or the obligations of any estate, as provided in this agreement.
9. Governing Law
This agreement is subject to and governed by the laws of [state], regardless of the fact that one or more
of the parties now is or may become a resident of another state.
10. Agreement To Prevail in Event of Variation with Terms of Charter
This agreement shall be incorporated in the corporate minutes of corporation. Where there is any
variation in the bylaws and/or the [articles or certificate] of incorporation of corporation, the provisions of
this agreement will prevail as between corporation's shareholders and any person having notice of this
agreement.
11. Duration
This agreement shall remain in effect until terminated by the unanimous written consent of the
shareholders, or until the corporation ceases to be a close corporation as defined in Section [number] of
the [state] General Corporation Law. In the event that an original issuance of shares by the corporation to
a new shareholder who does not become a party to this agreement, this agreement shall nevertheless
continue in full force and effect to the extent it is enforceable apart from the provisions of Section
[number] of the [state] General Corporation Law.
12. Entire Agreement; Waiver, Modification, and Change
This agreement contains the entire agreement of the parties with respect to its subject matter, and no
waiver, modification, or change will be valid unless contained in a writing signed by the party or parties to
be bound.
In witness whereof, the parties have executed this agreement at [place of execution] the day and year first
above written.
[signatures]
NOTES
While shareholders' agreements are essential for any statutory close corporation, they may also be
useful for other types of closely held corporations. If desired, shareholders may include provisions
covering all aspects of corporate management and operations, as well as the details of employment
arrangements and buy-sell agreements. In this comprehensive form of agreement, the parties cover
future issuances of shares, management and control of the corporation, employment of the shareholders,
and buy-sell arrangements.
Recitals
A shareholders' agreement will be most effective as a tool for managing the corporation if all the
shareholders, including the holders of relatively small ownership interests, are parties to the agreement.
Accordingly, the recitals should acknowledge, if true, that the parties constitute all the shareholders of the
corporation, and should also describe the general purposes of the agreement. Among other things, the
agreement may serve as a vehicle for the parties to provide for the election of directors and officers,
establish employment relationships between the shareholders and the corporation, and describe any buysell arrangements.
1. Stock Purchases
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The agreement should include a description of the current capital structure of the corporation, any
preemptive rights with regard to future issuances of new shares, and the effect of any recapitalization or
other similar future changes in the capital structure.
1.1. Capitalization
The agreement should describe the number of shares of stock currently held by each of the
shareholders. If appropriate, reference should be made to the consideration paid for each of the shares.
The agreement should also include an acknowledgment that each of the shareholders is entitled to stock
certificates for their shares.
1.2. Preemptive Rights
In most cases, the parties will want to provide that preemptive rights will apply to any future issuances
of shares by the corporation. Preemptive rights can be used to protect the shareholders against the
possible dilutive effect of issuing shares to nonshareholders or disproportionate issuances among the
current shareholder group.
1.3. Changes in Capital Structure
The parties will wish to ensure that any changes in the capital structure would not adversely impact
the relative ownership rights of the parties. For example, the agreement will provide that in the event that
the outstanding shares are changed or exchanged for different number of shares as a result of a merger,
consolidation, or other recapitalization, then an appropriate adjustment will be made to the shares
currently held by the shareholders. The same would apply in the event of a stock dividend with respect to
outstanding shares.
2. Directors; Officers; General Operations
One of the most important purposes of the shareholders' agreement is to set out the understanding of
the shareholders as to management and control of the corporation. Among other things, the agreement
will include procedures for the election of directors and officers, maintenance of corporate funds, auditing
of the corporation's books and records, restrictions on the activities of the managers of the corporation,
indemnification provisions applicable to directors and officers, dividend payment requirements, and
instructions regarding the maintenance and inspection of corporate records and reports.
2.1. Directors and Officers
The parties should agree among themselves as to which of them will serve as directors and officers
of the corporation, and the agreement will specify that the parties agree to vote their shares as required to
effect those choices. In many cases, each shareholder will serve as a director of the corporation. The
selection of officers obviously depends on the preferences of the parties. In most cases, the agreement
provides for election of a president, one or more vice-presidents, a secretary, and a chief financial officer
or treasurer.
Provision may be made for the resolution of disputes in the event the board of directors is unable to
reach decision on any matter. One possibility is to provide in advance for selection of an interim director
who will serve solely for the purpose of resolving a particular dispute. If an interim director procedure is
used, the parties should agree to indemnify the designee for acts taken while serving as a director.
2.1. Option: Specification of Officers' Duties
While the duties and responsibilities of the various officers of the corporation are generally laid out in
the bylaws, the parties may prefer to include a detailed description in the shareholders' agreement that
purports to regulate the appointment of officers. The provisions set forth herein are generic, and are
typical of the language that might be found in the corporate bylaws. The parties are free, however, to vary
the descriptions. For example, limitations on the president's authority to enter into specified contracts may
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be included in the description of his or her duties. Also, the responsibilities of the various vice president's
might be further distinguished, as might be appropriate when the corporation has a vice president for
each of its basic functions (e.g., sales, manufacturing, legal, etc.).
2.2. Corporate Funds
The agreement should specify the location of the corporation's bank account, and it may also include
limitations on the amount of checks or drafts which may be written without the consent of at least two of
the officers.
2.3. Auditors
Provision should be made in the agreement for the selection of accountants or auditors to examine
the corporation's financial books and records, and prepare financial reports for distribution to the
shareholders, on a regular basis.
2.4. Restrictions on Management
While many matters concerning the operations for the corporation will be dealt with by majority rule,
there are generally some actions which cannot be taken without obtaining the consent of all of the
shareholders, or some percentage-in-interest of the shares that is well in excess of a simple majority vote.
Such actions should be listed in the agreement, and may include:







Issuances of additional shares;
Sales of significant assets of the corporation;
Execution of contracts which impose material financial obligations from the corporation;
Significant increases in salaries;
Mergers and consolidations;
Changes in the business of the corporation; and
Engaging in activities which specifically contradict the terms of the agreement.
2.5. Indemnification
The agreement should provide for the corporation to indemnify each of the officers and directors of
the corporation to the extent permitted by applicable law. In most cases, indemnification will not be
available for activities which are either unlawful, or fall outside the scope of the officers or directors
corporate authority. The indemnification provision in the main form is a short-form version, and leaves the
details to a separate agreement and/or the corporation's bylaws and the relevant state statute dealing
with indemnification of corporate agents. Alternatively, the shareholders may elect to include detailed
provisions relating to indemnification directly in this agreement, particularly if no separate indemnification
agreement is contemplated (see Alternative). In any event, counsel should carefully review the
procedures for indemnification in the applicable state corporations law before drafting an indemnification
provision.
2.5. Alternative: Detailed Procedures of Indemnification
This is a detailed form of indemnification provision. While the language is typical of the protections
afforded to directors and officers of publicly-traded corporations, it can also be used with smaller,
privately-held corporation. The indemnification afforded to agents under the provisions extends beyond
service as a director or officer of the corporation to include other activities on behalf of the corporation.
The provision also contemplates that the corporation will advance the indemnified party such amounts as
may be necessary to defend a claim covered by the indemnification clause. The language includes the
standard of care applicable to the indemnified party, and provides that indemnification will not be available
in cases where the party did not act in good faith in the reasonable belief that his or her action was in the
best interest of the corporation.
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2.6. Dividends
The parties may wish to include provisions regarding the payment of dividends. In many cases, the
agreement simply provides that dividends will be paid at such times as may be determined by the board
of directors. In other cases, the parties may wish to ensure that payment of some minimum dividend
amount is made each year, although any “required payment” will nonetheless still be subject to any
restrictions on dividends or distributions included in the state's corporation laws.
3. Records and Reports
The parties may wish to incorporate the provision of applicable state law regarding the maintenance
of books and records regarding the corporate affairs, as well as any requirements regarding distribution of
an annual financial or business report.
3. Option: Contents of Financial Statements Included in Annual Report
State corporation law statutes may mandate the form and content of shareholders' reports; however,
the shareholders may, either in the bylaws or in a separate agreement such as this, restate the statutory
requirements and/or include their own separate requirements that must be satisfied. The scope of the
disclosures often depends on the needs of the shareholder group and the degree to which certain
shareholders may be uninvolved with various aspects of the day-to-day operations of the business.
This provision contemplates disclosures of “interested transactions” between the corporation and
officers or directors that have a value in excess of a specified amount, and is generally based on the
requirements suggested by California law. However, counsel should carefully review any other
requirements which may be imposed under the laws applicable to the particular corporation. For example,
while in California the disclosure level for “interested transactions” is any contract in excess of $40,000,
other states may establish different requirements. Also, while California requires disclosures of
indemnification payments which exceed $10,000 annually, other states may not have a similar
requirement or may have another financial threshold.
4. Employment
The parties may include various provisions regarding the shareholders in their capacities as
employees of the corporation, include the general terms of their employment arrangements, restrictions
on competitive activities, various representations and warranties regarding their ability to be actively
involved in the corporation's business, purchase of life and disability insurance on the employeeshareholders by the corporation, and the obligations of the employee-shareholder to protect the
corporation's confidential information.
4.1. Employment of Shareholders
The parties can include a variety of provisions relating to the corporation's employment of the
shareholders. Among the areas that might be covered are the duties of each shareholder in his or her
capacity as an employee, the amount of compensation to be paid to each employee-shareholder
(including benefits), and the circumstance under which employment of a shareholder may be terminated.
If desired, the parties may actually draft a form of employment agreement for use in connection with the
shareholders, and include it as an exhibit to the agreement.
In this case, the parties have provided that each of the shareholders will be employed by the
corporation to perform such duties as may be designated by the board of directors. The parties have also
specified that one of them, presumably the one who will be acting as president of the corporation, will
have overall responsibility for management of certain aspects of the corporate activities. In addition, the
agreement provides for the payment of equal amounts of compensation to each shareholder.
4.2. Restrictions on Competitive Activities
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The agreement will typically include some general representations from the employee-shareholders
regarding their level of commitment to the business of the corporation, as well as restrictions on their
ability to engage in activities which either compete with those of the corporation and/or which may divert
their attention from the corporation's activities.
In this case, each of the shareholders agrees to devote his or her best efforts and entire time and
attention to the business of the corporation. In addition, each shareholder agrees not to engage, directly
or indirectly, in any other business; provided, however, shareholders are not be prevented from owning a
noncontrolling position in a publicly traded company or from acting as a consultant to persons or firms
who are not engaged in activities which are competitive with the corporation. In the event that a
shareholder engages in such consulting activities, he or she will be obligated to keep the other
shareholders advised of the consultancy, including the name of the person or firm for which the
shareholder is working and the general nature of the consulting activities.
4.3. Conflicting Obligations
Each shareholder should represent and warrant that he or she is not limited or restricted from
engaging in the business contemplated by the corporation, and will also agree to indemnify the other
shareholders in the corporation in the event of any legal action by a third party seeking to prevent the
shareholder from engaging in the activities of the corporation. These types of representations are
primarily directed at restrictions which might be contained in agreements with prior employers.
4.4. Health and Life Insurance
The agreement may provide for the corporation to purchase health and/or life insurance with respect
to one or more of the shareholders. The decision to purchase the insurance, as well as the amount and
terms of the insurance, shall be left to the discretion of the corporation, which shall determine such
matters with regard to protection of its own interests. The corporation will agree to pay all premiums on
any insurance policies and the corporation will be the sole owner of the policies. Shareholders will have
the right to purchase life insurance policies owned by the corporation on them at the time of the
termination of their employment.
4.5. Disability Insurance
In addition to the other benefits provided to the shareholders pursuant to their employment by the
corporation, the parties may wish to explicitly provide that the corporation shall purchase and maintain
disability insurance coverage on each of the shareholders. In such cases, the agreement should specify
the amount of coverage. The disability insurance coverage provisions should be carefully integrated with
any additional provisions applicable to a disabled shareholder under the buy/sell provisions contained
elsewhere in the agreement.
4.6. Protection of Confidential Information
The agreement should include an undertaking by each of the shareholders to protect and maintain in
confidence all the corporation's trade secrets and other proprietary information.
4.7. Option: Assignment of Inventions
This provision is a general form of assignment covering inventions which any of the shareholders may
have developed in the past and which relate to the corporation's current or proposed business. In
determining what inventions are covered by the assignment, reference is made to a specific document,
such as the corporation's business plan, wherein the inventions may be described along with the
corporation's business activities. If no such document exists, the provision might refer to a list of specific
inventions that might be appended to the agreement as an exhibit. This provision does not clearly cover
inventions which shareholder-employees may develop in the future. If the parties believe that
shareholder-employees will develop inventions after the date of the agreement, the clause might be
17
expanded to provide for assignment of such inventions or, alternatively, the corporation may enter into a
separate form of assignment of inventions agreement with employees engaged in inventive work.
5. Buy-Sell Provisions
While the parties may enter into a separate buy-sell agreement, it is also common for the parties to
include various restrictions on transfers of shares, as well as certain options and obligations to purchase
shares upon the occurrence of certain events, in the main shareholders' agreement.
5.1. Restrictions on Transfers
The shareholders will agree not to transfer any shares of stock in the corporation without complying
with the provisions of the agreement.
5.2. Right of First Offer
The agreement generally restricts a shareholder from transferring or encumbering his or her shares
without first offering to sell the shares to the corporation and/or the other shareholders. The agreement
should set forth the procedures to be followed with respect to the right of first offer, including a
requirement that the selling shareholder provide notice to the corporation and the other shareholders, and
the procedures to be followed in determining whether the corporation or the other shareholders will
purchase the shares.
5.3. Right To Cause Repurchase of Shares
One or more of the shareholders may be given the right to compel the corporation to purchase the
shares of other specified shareholders. The purpose of such a provision is to guard against the possibility
of deadlock in the event that shareholders owning a minority of shares are unwilling to consent to certain
actions.
5.4. Disability
In the event that any shareholder shall become disabled during the term of his or her employment
with the corporation, the corporation and/or the remaining shareholders are generally given the right to
repurchase the shares of the disabled shareholder.
5.5. Termination of Employment
In the event a shareholder's employment with the corporation terminates, the corporation will be given
the opportunity to repurchase the terminated shareholder's shares. In addition, the terminated
shareholder will resign all of his or her offices with the corporation, as well as his or her position on the
board of directors.
5.6. Death
Death of a shareholder may give rise to a mandatory obligation on the part of the estate of the
deceased shareholder to sell the shareholder's shares back to the corporation, and an obligation on the
part of the corporation to repurchase those shares on the terms set forth in the agreement.
5.7. Certain Definitions
Several of the key provisions typically included in any buy-sell turn on carefully defined concepts,
such as “book value” and “net sales.” As such, the drafter may elect to use a separate definition section,
rather than including definitions within other substantive provisions. In this case, the definitions are
relevant to determining the purchase price for the shares which will be purchased pursuant to other parts
of this section.
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5.8. Purchase Price
There obviously are many ways to determine the purchase price to be paid for shares in a buy-sell
arrangement. In this case, the parties have agreed that the value of the shares will be the sum of the book
value of the shares as reflected in the financial statements of the corporation plus an amount equal to the
value of the goodwill associated with the shares. The agreement includes the definition of book value,
which is to be computed by the corporation's independent accountants in accordance with generally
accepted accounting principles. In addition, the goodwill of the shares will be determined by reference to
a percentage of the net sales of the corporation over a period of years following the purchase of the
shares. The agreement should include a covenant from the corporation that it will not dispose of any
material, trademark, or assets of the corporation during the pay out period.
5.9. Involuntary Transfers
The agreement may cover the situation where shares are transferred to a third party in a involuntary
transfer, including a transfer pursuant to a judicial order or enforcement of pledge. In such cases, the
corporation may be given the right to repurchase the shares from the third party. The terms of the
repurchase will be less favorable than in other situations, and in this case, the purchase price will be the
lower of the price determined pursuant to the formula or the price actually paid by the third party for the
shares.
5.10. Transfers in Violation of Agreement
The agreement should specifically provide the transfers made in violation of the terms and conditions
set forth therein will be null and void.
5.11. Corporate Actions
The corporation should agree to make available sufficient surplus to allow it to repurchase any shares
that it becomes obligated to purchase under the agreement. In the event that the corporation does not
have sufficient surplus to purchase shares at the time purchase is required, the corporation will agree to
take such actions as may be necessary for it to make such surplus readily available.
5.12. Terms of Payment
The agreement should set forth the procedures to be followed in paying the purchase price to the
seller. A variety of methods can be used, including cash payments or installment payments under a
promissory note. In addition, payments with respect to goodwill should be made within a specified period
following the end of each fiscal year during which such payments are due. The selling shareholder would
generally be given the right to inspect the corporation's books and records to ensure that the payments
for goodwill have been properly computed. In cases where a portion of the purchase price is to be paid
pursuant to a promissory note, the terms of the promissory note should be set out in the agreement or,
included as an Exhibit to the agreement.
5.13. Security Interest
In cases where the purchaser is delivering a promissory note to the seller, provision should be made
for the shares of stock to be pledged as security for fulfillment of the obligations. In this case, the share
certificates for the shares are to be deposited with the seller as security for the payment obligations. The
agreement makes it clear that the secure party will have all the rights provided for in the applicable
version of the Uniform Commercial Code. While the shares are being pledged, the purchasers will retain
the right to vote the stock and receive cash dividends; however, if the purchaser shall default upon
payment the stock will be transferred back to the secured party.
6. Stock Certificate Legend
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The share certificates for the shares held by each of the shareholders should bear a legend which
references the restrictions on transfer as well as the fact that the shares themselves are subject to the
terms of the shareholder's agreement. The legend should make it clear that a copy of the shareholders'
agreement can be inspected at the corporation's principal offices.
7. Notices
The agreement should include a procedure for notices and communications between the parties
relating to the matters covered in the agreement.
8. Parties Bound; Further Acts
The agreement should make it clear that the agreement is intended to be binding on the parties, as
well as on their heirs, executors, successors and assigns. In addition, the party should agree to take all
further actions necessary to ensure that the purposes of the agreement are carried out. In some cases,
specific provisions may be included requiring the shareholders to include the instructions in their wills and
other documents that should be followed by their legal representatives.
9. Governing Law
The agreement should specify the law which is to govern the matters covered in the agreement.
10. Agreement To Prevail in Event of Variation with Terms of Charter
Since a number of matters covered in the shareholders' agreement may also be referred to in the
corporation's charter documents (e.g., articles of incorporation and bylaws), language should be inserted
to make it clear that the provisions of the shareholders' agreement are, to the extent permitted by law, to
control in the event of a conflict with the charter documents.
11. Duration
It is important for the parties to specify the duration of the agreement. One common method is to
provide that the agreement shall remain in effect until terminated or modified by the unanimous written
consent of all the parties to the agreement, or until the corporation ceases to qualify for statutory close
corporation status. Another method which might be used is to provide for a fixed term in the agreement.
12. Entire Agreement; Waiver, Modification, and Change
There should be language in the agreement providing that the agreement itself is the entire
understanding between the parties with respect to the subject matter, and in no waiver, modification or
change to the agreement will be valid unless signed in writing by all the parties to the agreement. This
type of provision is important to ensure that there are no other understandings or oral agreements which
might conflict with the terms of the agreement and cause disputes in the future.
20
VOTING AGREEMENT—MASTER FORM WITH COMMENTARY
Source: Gutterman, Business Transaction Solutions (BUSTRANSOL §11:79)
Overview:
This form of voting agreement is suitable for use in situations where two distinct groups of company
shareholders have been identified and the parties wish to create a structure for allocating the decisionmaking responsibilities with respect to election of directors and other matters. The fact situation used in
this form assumes that one group consists of investors who have purchased a significant block of shares
and the other group consists of employee-shareholders, including founders of the company who hold a
large block of common shares. The agreement also covers rights among the members of a particular
group, including the right of certain investors to designate the nominees of their group to the board of
directors. Presumably, this form can be adapted to other situations, such as when the shares are held by
two families owning equal interests in the corporation.
This type of agreement may be used in lieu of class voting rights in the charter documents; however,
the investors usually will prefer to also have their rights set out in the charter documents due to concerns
over the enforceability of a separate voting agreement. This main provisions in this agreement only cover
the election of directors; however, alternative and optional provisions have been included which would
expand the scope of the agreement to include a wide range of other matters which might otherwise come
before the shareholders for review and approval.
The agreement should always carefully identify each of the parties, including new shareholders who
may be added over the term of the agreement. This form provides that new shareholders must become
parties to the agreement by executing and delivering an addendum in the form attached. The form of
addendum is an accession agreement. The Exhibits listing each of the parties to the agreement should be
continuously updated, particularly in situations where a great number of shareholder actions are covered
by the agreement.
The drafter should carefully understand and observe the definitional concepts included in the
agreement with respect to the parties. The term “Investors” includes outside investors in the company,
including any new investors who may provide significant amounts of capital in the future. The term
“Employee-Shareholders” includes not only the founders, but all other employees who may acquire
common shares though compensation arrangements. All the shareholders taken together are referred to
as “Shareholders” for purposes of provisions, such as legend requirements, that apply to all parties to the
agreement without regarding to how they acquired their shares.
This Agreement is entered into as of this [date] among (i) [name], a [state] corporation (the “Company”),
(ii) the purchasers of the Company's [description of stock] listed on Schedule [number/letter] attached
hereto (collectively, the “Investors”), (iii) the employee shareholders of the Company listed on Schedule
[number/letter] attached hereto (collectively the “Employee Shareholders”), and (iv) each of the persons
who shall, after the date hereto, acquire or receive the right to acquire any shares of capital stock of the
Company and are required to become a party to this Agreement by executing and delivering to the
Company an Accession Agreement in the form of Exhibit A hereto. The Investors, Employee
Shareholders, and other persons who may become a party to this Agreement after the date hereof as
provided above are sometimes referred to herein individually as a “Shareholder” and collectively as the
“Shareholders.”
Recitals
21
WHEREAS, contemporaneously with the execution and delivery of this Agreement, the Investors are
purchasing [number] shares of the Company's [description of stock] at a price of [dollar] per share
pursuant to the Company's Stock Purchase Agreement of even date herewith (the “Purchase
Agreement”) among the parties hereto;
WHEREAS, the Employee Shareholders have acquired shares of the Company's [description of stock]
pursuant to certain employee stock purchase and shareholder agreements between such Employee
Shareholders and the Company (the “Employee Agreements”); and
WHEREAS, the parties hereto have agreed upon the representation of the Company's Board of Directors
(the “Board”), which agreement is material to the decision of all parties in entering into the Purchase
Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual covenants hereinafter
contained, the parties hereto agree as follows:
1. Shares Subject to Agreement
1.1. Investors' Shares
The Investors, as the holders of [number] shares of the Company's [description of stock] (as presently
constituted) and as set forth on Schedule I attached hereto, each agree on behalf of themselves and any
person to whom they transfer any [description of stock], during the term of this Agreement and any
extensions thereof, to hold all of the [description of stock] registered in their respective names (and any
securities of the Company issued with respect to, or in exchange or substitution therefor) (hereinafter
collectively referred to as the “Investors' Shares”) subject to, and to vote the Investors' Shares in
accordance with, the provisions of this Agreement.
1.2. Employee Shareholders' Shares
The Employee Shareholders, as the holders of [number] shares of the Company's [description of stock]
(as presently constituted) and as set forth on Schedule II attached hereto, each agree on behalf of
themselves, and any person to whom they transfer any [description of stock], during the term of this
Agreement and any extensions thereof, to hold all of the [description of stock] registered in their
respective names (and any securities of the Company issued with respect to, or in exchange or
substitution therefor) (hereinafter collectively referred to as the “Employee Shareholders' Shares”) subject
to, and to vote the Employee Shareholders' Shares in accordance with, the provisions of this Agreement.
1.3. Shares Acquired in Future by Parties
Each of the Shareholders expressly agree that the terms and restrictions of this Agreement shall apply to
all shares of capital stock of the Company which any of them hereafter acquires by any means during the
term of this Agreement and any extensions thereof, including without limitation by purchase, assignment
or operation of law, or as a result of any stock dividend, stock split, reorganization, reclassification,
whether voluntary or involuntary, or other similar transactions, and to any shares of capital stock of any
successor in interest of the Company, whether acquired by sale, merger, consolidation or other similar
transaction. Schedules I and II shall be appropriately amended from time to time during the term of this
Agreement to reflect future acquisitions of shares of capital stock of the Company by the Shareholders.
1.4. Future Issuances of Company Shares
The Company agrees that it shall not, during the term of this Agreement and any extensions thereof,
issue any new shares of the Company's [description of stock] to any person who is not already a party to
this Agreement unless and until the person to whom such shares are to be issued becomes a party to this
Agreement and agrees to be bound by all the provisions hereof. Such person shall become a party to this
Agreement by executing and delivering an Accession Agreement in the form of Exhibit A hereto.
1.4. Alternative: Holders of Minimum Percentage of Shares
In connection with any purchase of the Company's Common Stock subsequent to the date of this
Agreement that results in any current or future employee of the Company holding of record [percent] or
22
more of the outstanding shares of Common Stock of the Company, the Company shall require such
employee, as a condition of the purchase, to agree to be bound by all of the terms and conditions of this
Agreement. Such person shall become a party to this Agreement by executing and delivering an
Accession Agreement in the form of Exhibit A hereto. Each such employee purchaser shall be deemed to
be one of the Employee Shareholders under this Agreement. The Company shall promptly notify the
Investors of the name of any subsequent employee purchaser.
The obligations of any Employee Shareholders who become a party to this Agreement pursuant to this
paragraph 1.4 shall terminate if such person ceases to be the beneficial holder of the requisite percentage
of the Common Stock; provided, that if such Employee Shareholder thereafter acquires the requisite
percentage of the Common Stock, he shall thereupon again agree to be bound by the terms hereof.
1.5. No Partnership Relationship
Notwithstanding, but not in limitation of, any other provision of this Agreement, the Shareholders
understand and agree that the creation, management and operation of the Company shall not create or
imply a general partnership between or among the Shareholders and shall not make any of the
Shareholders the agent or partner of any other Shareholder for any purpose.
2. Designations of Directors
(a) Designation. During the term of this Agreement, the number of members of the Company's Board of
Directors shall be [number]. Each time the shareholders of the Company meet, or act by written
consent in lieu of meeting, for the purpose of electing directors (an “Election of Directors”), the
Investors and the Employee Shareholders agree that of the [number] directors on the Board, the
Investors shall designate [number] director-nominees, the Employee Shareholders shall designate
[number] director-nominees, and the last [number] director-nominees shall be selected by the
Employee Shareholders and the Investors (as described below). The [number] directors-nominees of
the Investors shall be designated by [names] (collectively, the “Designating Shareholders”), each
designating one director-nominee. The [number] director-nominees of the Employee Shareholders
shall be selected by vote of a majority of the holders of the Employee Shareholders' Shares. The
remaining [number] director-nominees (“at large nominees”) shall be those individuals designated by
both the representatives of the Investors and the Employee Shareholders, each voting as a separate
class, to complete a slate of [number] director-nominees.
(b) Vacancies and Removal of Directors. In the case of any vacancy in the office of a director occurring
among the directors designated by the Investors or the Employee Shareholders, the remaining
director or directors collectively designated by the respective group may, by the remaining director or
directors so elected by the group, or if there is no such director remaining, by the aforementioned
vote of the members of the respective group, elect a successor or successors to hold the office for
the unexpired term of the director or directors whose place or places shall be vacant. Any director
who shall have been designated by the Investors or the Employee Shareholders, or any director so
elected as provided in the preceding sentence hereof, may be removed during his term of office,
whether with or without cause, only by the aforementioned vote of the group that designated such
director. If there is a vacancy of an “at-large” director, the director to fill that vacancy shall be
designated by the mutual consent of the directors representing the Investors and the Employee
Shareholders, each voting as a separate group of electors.
(c) Termination of Designating Shareholders' Rights. The right of any Designating Shareholder to
designate a director hereunder, and the obligation of any Investor to vote for the designee of any
Designating Shareholder hereunder, shall cease upon the failure of such Designating Shareholder (or
its partners, shareholders, parents, subsidiaries, affiliates, or other group members) to own of record
an aggregate of at least [percent] of the [description of stock] purchased by it pursuant to the
Purchase Agreement. Notwithstanding the preceding sentence, if such Designating Shareholder
thereafter reacquires beneficial ownership of at least [percent] of the [description of stock] purchased
by it pursuant to the Purchase Agreement, the rights of such Designating Shareholder and the
obligations of each Investor with respect to such Designating Shareholder hereunder shall reaccrue.
In the event that any Designating Shareholder's right to designate a director terminates as provided
23
herein, the remaining Designating Shareholders shall mutually agree as to the manner in which the
director previously designated by such Designating Shareholder shall thereafter be designated, and
each of the Investors agree to be bound by such determination. In the event that all Designating
Shareholders' rights to designate directors terminate as provided herein, the [number] directornominees of the Investors shall be selected by a vote of a majority of the holders of Investors' Shares.
2. Alternative 1: Designation by Management Group
(a) Designation. Except as otherwise provided herein, each time the shareholders of the Company meet,
or act by written consent in lieu of meeting, for the purpose of electing directors (an “Election of
Directors”), [number] directors shall be elected. Of the [number] directors on the Board, the Investors
shall have the right to designate, by a majority vote of the Investors' Shares [number] directors; the
Employee Shareholders shall designate one (1) director who shall be the Chief Executive Officer of
the Company; and the remaining [number] directors (the “at-large” directors) shall be designated by
both the Investors and by a majority vote of the Vested Shares of Common Stock (as defined below)
held by those Employee Shareholders who remain employed by the Company or an affiliate thereof
at the time of such vote (the “Management Group”), each voting as a separate group, provided that if
the Management Group shall not vote to elect a designee of the Investors for all of the
aforementioned “at-large” director vacancies, then such director or directors (as the case may be)
shall be elected by the affirmative vote of the holders of a majority of the Common Stock. Nominees
for the positions on the Board shall be nominated by the previous Board in the following manner: (i)
the directors representing the Investors shall nominate the directors to be designated by the
Investors; (ii) the Board shall nominate the Company's Chief Executive Officer to represent the
Employee Shareholders; and (iii) the Board shall nominate the directors to be designated by the
Investors and the Management Group, subject to the right of the holders of a majority of the
outstanding shares of Common Stock to elect such directors as specified in the preceding sentence
in certain circumstances. Any “at-large” director shall be a person otherwise unaffiliated with the
Investors or the Company.
(b) Vacancies and Removal of Directors. In the case of any vacancy in the office of a director occurring
among the directors designated by the Investors, the remaining director or directors collectively
designated by the Investors may, by the remaining director so elected if there is but one, or if there is
no such director remaining, by the aforementioned vote of the members of the respective group, elect
a successor or successors to hold the office for the unexpired term of the director or directors whose
place or places shall be vacant. Any director who shall have been designated by the Investors or the
Management Group, or any director so elected as provided in the preceding sentence hereof, may be
removed during his term of office, whether with or without cause, only by the aforementioned vote of
the group that designated such director. If there is a vacancy of the Employee Shareholders' director,
the director to fill that vacancy shall be a member of the Management Group designated by the Board
as Chief Executive Officer and director. If there is a vacancy of an “at-large” director, the director to fill
that vacancy shall be designated by the mutual consent of the directors: (i) representing the
Investors; and (ii) the director representing the Management Group, each voting as a separate group
of electors, subject to the right of the holders of a majority of the outstanding shares of Common
Stock to elect such directors as specified above in certain circumstances.
(c) Definition of Vested Shares of Common Stock. As used herein, the term “Vested Shares of Common
Stock” shall refer to those shares of Common Stock owned by Employee Shareholders which are not
subject to repurchase by the Company upon the occurrence of certain events described in the
employment agreements between the Company and such Employee Shareholders, including
termination of the Employee Shareholders' employment prior to the date specified in such
employment agreements.
(d) Cessation of Employment of Management Group Member. In the event any Employee Shareholder
ceases to be employed by the Company or any affiliate thereof for any reason prior to the termination
of this Agreement, such Employee shall cease to be a member of the Management Group for
purposes of designating directors under paragraph 2 hereof, provided however that such Employee
Shareholder shall continue to be bound by those provisions of this Agreement which require such
24
Employee to vote his Employee Shareholder's Shares in the manner specified herein. The parties
hereto agree that in the event that any Employee Shareholder shall cease to be a member of the
Management Group as described herein and a replacement is otherwise designated by the Board of
Directors, then such replacement shall, as a condition of such service, become a party to this
Agreement in the same manner as his predecessor.
2. Alternative 2: Change of Control Upon Default
(a) Ordinary Designation of Directors. During the term of this Agreement, the number of members of the
Company's Board of Directors shall be [number]. Except as provided upon an Event of Default as
described below, each time the shareholders of the Company meet, or act by written consent in lieu
of meeting, for the purpose of electing directors (an “Election of Directors”), the Investors and the
Employee Shareholders agree that of the [number] directors on the Board, the Investors shall
designate [number] director-nominees, the Employee Shareholders shall designate [number] directornominees, and the last [number] director-nominees shall be selected by the Employee Shareholders
and the Investors (as described below). The [number] directors-nominees of the Investors shall be
designated by [names] (collectively, the “Designating Shareholders”), each designating one directornominee. The [number] director-nominees of the Employee Shareholders shall be selected by vote of
a majority of the holders of the Employee Shareholders' Shares. The remaining [number] directornominees (“at large nominees”) shall be those individuals designated by both the representatives of
the Investors and the Employee Shareholders, each voting as a separate class, to complete a slate of
[number] director-nominees. The representatives of the Investors and the Employee Shareholders,
each voting as a separate class, shall also agree upon and designate one of the at-large directornominees to step down upon the occurrence of an Event of Default, as discussed below.
(b) Designation Upon Event of Default. Upon the occurrence of an “Event of Default” as defined in the
Company's Articles of Incorporation, permitting the Investors to designate a majority of the Board, the
Designating Shareholders, in addition to each supplying a nominee for election to the Board, shall
agree upon such person or persons to jointly nominate to the Board (the “Joint Nominee”) as are
necessary to obtain not more than a majority of the voting members of the Board. In such event, each
of the Investors shall have the right to approve by majority vote the Joint Nominee for election to the
Board. A Joint Nominee so approved shall serve on the Board until such time as the Investors are no
longer entitled to elect a majority of the Board under the Articles of Incorporation.
(c) Vacancies and Removal of Directors. In the case of any vacancy in the office of a director occurring
among the directors designated by the Investors or the Employee Shareholders, the remaining
director or directors collectively designated by the respective group may, by the remaining director or
directors so elected by the group, or if there is no such director remaining, by the aforementioned
vote of the members of the respective group, elect a successor or successors to hold the office for
the unexpired term of the director or directors whose place or places shall be vacant. Any director
who shall have been designated by the Investors or the Employee Shareholders, or any director so
elected as provided in the preceding sentence hereof, may be removed during his term of office,
whether with or without cause, only by the aforementioned vote of the group that designated such
director. If there is a vacancy of an “at-large” director, the director to fill that vacancy shall, subject to
the rights of the Investors upon the occurrence of an Event of Default as set forth in subparagraph (b)
above, be designated by the mutual consent of the directors representing the Investors and the
Employee Shareholders, each voting as a separate group of electors.
(d) Termination of Designating Shareholders' Rights. The right of any Designating Shareholder to
designate a director hereunder, and the obligation of any Investor to vote for the designee of any
Designating Shareholder hereunder, shall cease upon the failure of such Designating Shareholder (or
its partners, shareholders, parents, subsidiaries, affiliates, or other group members) to own of record
an aggregate of at least [percent] of the [description of stock] purchased by it pursuant to the
Purchase Agreement. Notwithstanding the preceding sentence, if such Designating Shareholder
thereafter reacquires beneficial ownership of at least [percent] of the [description of stock] purchased
by it pursuant to the Purchase Agreement, the rights of such Designating Shareholder and the
obligations of each Investor with respect to such Designating Shareholder hereunder shall reaccrue.
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In the event that any Designating Shareholder's right to designate a director terminates as provided
herein, the remaining Designating Shareholders shall mutually agree as to the manner in which the
director previously designated by such Designating Shareholder shall thereafter be designated, and
each of the Investors agree to be bound by such determination. In the event that all Designating
Shareholders' rights to designate directors terminate as provided herein, the [number] directornominees of the Investors shall be selected by a vote of a majority of the holders of Investors' Shares.
3. Election of Directors
Each of Shareholders jointly and severally agrees that at any Election of Directors, each will, to the extent
permitted by the Company's Articles of Incorporation, cast his, her, or its votes for the [number] directornominees selected by the process set forth in paragraph 2 above.
4. Conduct of Board Actions
It is agreed that all decisions of the Board shall require [number] affirmative votes, provided that directors
designated by the Investors shall not vote with respect to transactions between the Company and the
Investors and in which case such transactions will only require the approval of a majority of the remaining
directors (even though less than [number] affirmative votes are cast).
4. Alternative: Special Vote on Fundamental Matters
Except as provided in the next sentence, it is agreed that all decisions of the Board shall require [number]
affirmative votes, provided that directors designated by the Investors shall not vote with respect to
transactions between the Company and the Investors and in which case such transactions will only
require the approval of a majority of the remaining directors (even though less than [number] affirmative
votes are cast). Notwithstanding the foregoing, during the term of this Agreement, no action shall be taken
with regarding to the following matters (“Fundamental Matters”) without the consent of [description of
consent requirement], and such consent shall not be unreasonably withheld:
(a) Amending or repealing any provision of the Company's Articles of Incorporation or Bylaws;
(b) Dissolving or liquidating the Company;
(c) Increasing or decreasing the number of directors comprising the Board of Directors of the Company;
(d) Changing the fundamental nature of the Company's business;
(e) Mortgaging or creating a security interest in the assets, including real property, of the Company;
(f) Entering into any loan agreement, financing arrangement, line of credit or similar agreement the effect
of which would be to borrow any money for whatever purpose in an amount in excess of [dollar];
(g) Hiring an employee or engaging an agent of the Company for compensation in an amount in excess
of [dollar] per annum;
(h) Issuing shares, rights, options, warrants to purchase or securities convertible into shares of stock of
the Company of any class, series or kind of stock (whether or not presently authorized), including
treasury stock;
(i) Merging or consolidating the Company with any other corporation or business entity, or acquiring the
assets or stock of another entity;
(j) Selling or transferring all or a substantial portion of the assets of the Company other than in the
ordinary course of business; and
(k) Entering into, terminating, or amending any material written or oral contractual agreement or
understanding between the Company and any shareholder of the Company or third party.
26
In the event of any material disagreement among the representatives of the Investors and the Employee
Shareholders on the Board with respect to any of the Fundamental Matters, the representatives agree to
promptly arrange for a meeting for the purpose of resolving the disagreement. The meeting shall be held
within [number] days following the date upon which a representative of one group delivers notice to
representatives of the other group calling for such a meeting. If the disagreement is not resolved within
[number] days from the date that the original notice of the meeting is given, then [description of
consequences].
5. Voting on Other Matters
This Agreement shall not extend to voting upon other questions and matters upon which shares shall
have the right to vote under the Company's Articles of Incorporation or Bylaws, or the laws of the State of
[name of state].
5. Alternative 1: Consent of Both Groups Required
The Shareholders agree (a) that on a proposal (whether or not made as a shareholders' meeting) to
amend the Company's Articles of Incorporation or bylaws, or to issue shares of the Company's stock, or
[description of action], they will all hold their shares, or sign consents taking action on such proposal as
may be mutually agreed by [percent]-in-interest of each of the Investors and Employee Shareholders,
each voting as a separate group, and (b) that failing agreement, all of the parties will vote against that
proposal and will refuse to sign a consent to that proposal. In the event of any material disagreement
among the Investors and the Employee Shareholders with respect to any of the matters listed above,
representatives of each group shall promptly arrange for a meeting for the purpose of resolving the
disagreement. The meeting shall be held within [number] days following the date upon which a
representative of one group delivers notice to representatives of the other group calling for such a
meeting. If the disagreement is not resolved within [number] days from the date that the original notice of
the meeting is given, then [description of consequences].
5. Alternative 2: Change of Control Transactions
Each time the shareholders of the Company meet, or act by written consent in lieu of meeting, for the
purpose of approving a consolidation or merger of the Company with or into any other corporation or
corporations, any other corporate reclassification, recapitalization, reorganization or other change or
exchange with respect to the outstanding shares of the Company's stock, a sale of all or substantially all
of the assets of the Company, or any similar transaction effecting a change in control of the Company
(collectively a “Change in Control Transaction”), each of the Employee Shareholders jointly and severally
agrees to vote the Employee Shareholders' Shares with respect to approving or disapproving such
Change in Control Transaction in the manner designated by the vote or consent of [percent]-in-interest of
the Investors. The Company shall furnish written notice to the Investors at least [number] days prior to
any such meeting or proposed action by written consent in lieu of meeting and the Investors shall furnish
written notice to each of the Employee Shareholders and the Board no later than [number] days following
receipt of the Company's notice of any such meeting or proposed action by written consent in lieu of
meeting of the manner in which the Investors desire the Employee Shareholders to vote their Employee
Shareholders' Shares with respect to approving or disapproving such Change in Control Transaction.
5. Alternative 3: Supermajority Vote of Investors Required
Except as expressly provided herein or in the Company's Articles of Incorporation or as required by law,
for so long as the Investors continue to hold any equity securities representing at least [percent]of the
Investors' Shares initially owned by the Investors as a group, then without the approval by vote or written
consent of [percent]-in-interest of the Investors, the Company shall not, and shall not permit any of its
subsidiaries, to do any of the following:
(a) Redeem, purchase, or otherwise acquire for value (or pay into or set aside for a sinking fund for such
purchases) any capital stock of the Company, and except for the repurchase of shares of Common
Stock held by employees, consultants, directors, or officers of the Company that are subject to stock
repurchase agreements and, if such repurchases would exceed [dollar] for any such employee,
consultant, director or officer, that have been approved by the vote or written consent of [percent]-in-
27
interest of the Investors in the event of termination of employment or the termination of the
relationship;
(b) Authorize or issue, or obligate itself to authorize or issue, (i) any other equity security having any
preference or priority over, or ranking senior to or on parity with, the Preferred Stock with respect to
dividends or rights upon liquidation, dissolution, or winding-up, (ii) other than (A) securities issuable
on conversion of the Preferred Stock or (B) Common Stock issuable pursuant to stock options
permitted to be granted by Company consistent with its contractual obligations, any other equity
security ranking junior to the Preferred Stock with respect to dividends or rights upon liquidation,
dissolution or winding-up or (iii) any security convertible into a security described in clauses (i) or (ii);
(c) Alter or change the powers, preferences or rights of the Preferred Stock, or the qualifications,
limitations or restrictions thereof;
(d) Increase or decrease (other than by conversion or as otherwise required or permitted hereby) the
total number of authorized shares of Preferred Stock;
(e) Sell, assign, license, or otherwise dispose of or voluntarily part with control of (or agree to do any of
these) any of the Company's material intellectual property rights to any other person, other than in
connection with ordinary customer sales, except as approved by the Board;
(f) Effect any merger, consolidation, recapitalization, reorganization, amalgamation, liquidation, winding
up, dissolution or sale, transfer or other action otherwise disposing of or voluntarily parting with the
control of (whether in one transaction or a series of transactions) all or substantially all of the
property, business or assets of the Company or its subsidiaries other than (i) a merger or
consolidation of a subsidiary with the Company or any other subsidiary of the Company provided that,
in the case of any such merger or consolidation, the person formed by such merger or consolidation
shall be a wholly owned subsidiary of the Company and (ii) any sale, lease, assignment, pledge,
transfer or other conveyance of all or a substantial portion of the assets of the Company solely as
security for institutional indebtedness approved by the Board;
(g) Amend its Articles of Incorporation or Bylaws;
(h) Declare or distribute any dividend (other than a stock dividend) in respect of capital stock, return any
capital to its stockholders as such, make any distribution of assets, capital stock, warrants, rights,
options, obligations or securities to its stockholders as such, or issue or sell any capital stock or any
warrants, rights or options to acquire such capital stock other than pursuant to stock options issued
pursuant to plans or agreements in an aggregate amount not to exceed [number] shares of Common
Stock (subject to appropriate adjustment for any stock dividend, stock split, combination, or other
similar recapitalization affecting such shares);
(i) Enter into any agreement, contract, commitment or understanding with any person for the acquisition
of any business or assets other than acquisitions not in excess of $3,000,000 in any one year;
(j) Materially change the nature of its business, taken as a whole on a consolidated basis as described
in the principal business plan of the Company as carried on at the date hereof and reasonable
extensions thereof; or
(k) Enter into any transaction with any affiliate or any officer, director or holder of more than 5% of the
outstanding capital stock of the Company which is not on terms comparable to an arms-length
transaction.
6. Dividends
This Agreement shall only affect the right of the Shareholders to vote their shares of the Company's
capital stock at a special or annual meeting of the Company or consent to proposals otherwise presented
28
to shareholders of the Company. Nothing herein shall restrict the Shareholders from receiving payments
of dividends or other distributions from the Company with respect to their shares of capital stock.
7. Restrictions on Transfer
The provisions of this Agreement shall be binding upon the successors in interest to any of the
Shareholders. No Shareholder may sell, assign, transfer, exchange, gift, devise, pledge, hypothecate,
encumber or otherwise alienate or dispose of any capital stock of the Company now owned by such party
or owned by such party during the term of this Agreement, or any right or interest therein, whether
voluntarily or involuntarily, by operation of law or otherwise, except in accordance with the procedures set
forth in [description]. Any such purported transfer in violation of such procedures and all actions by the
purported transferor and transferee in connection therewith that might otherwise be covered by the terms
and conditions in this Agreement shall be of no force or effect and the Company shall not be required to
recognize such purported transfer for any purpose, including without limitation for purposes of dividend
and voting rights. The Company shall not permit the transfer of any of the Investors' Shares or the
Employee Shareholders' Shares on its books or issue a new certificate representing any of such shares
until the proposed transferee(s) agree in writing to become a party to this Agreement and to hold the
capital stock of the Company acquired in such transfer subject to the terms and conditions of this
Agreement and the procedures set forth in [description].
8. Termination
This Agreement shall terminate on the earlier of:
(a) [date];
(b) The date on which no shares of the [description of stock] remain outstanding;
(c) The closing of the sale of the Company's Common Stock in a firm commitment, underwritten public
offering registered under the Securities Act of 1933, as amended, at a public offering price of not less
than $[dollar amount] per share (prior to underwriter commissions and expenses) of Common Stock
(as adjusted for subdivisions and combinations of shares and Common Stock dividends) and the
aggregate gross proceeds to the Company of not less than $[dollar amount] (after deduction of
underwriter commissions and the Company's expenses relating to the issuance, including without
limitation fees of the Company's counsel);
(d) The effective date of a merger of the Company with or into another corporation in which the Company
is not a survivor or the sale of all or substantially all of the assets of the Company; or
(e) Written approval by holders of [percent]-in-interest of the Investors' Shares, on the one hand, and
holders of [percent]-in-interest of the Employee Shareholders' Shares, on the other hand.
9. Representations and Warranties
Each of the Shareholders hereby represents and warrants to the Company and to each other as follows:
9.1. Absence of Violation
Neither the execution and delivery of this Agreement nor the consummation of the transactions
contemplated hereby will constitute a violation of, or default under, or conflict with, or require any consent
under any term or provision of any contract, commitment, indenture, lease or other agreement to which
such Shareholder is a party or by which such Shareholder or any of his, her or its assets is bound.
9.2. Binding Obligation
This Agreement constitutes a valid and binding obligation of such Shareholder, enforceable in accordance
with its terms, except to the extent that such enforceability may be limited by bankruptcy, insolvency and
similar laws affecting the rights and remedies of creditors generally, and by general principals of equity
and public policy.
10. Legend Required
29
Each certificate representing any of the Investors' Shares and Employee Shareholders' Shares shall be
marked by the Company with a legend reading as follows:
The shares evidenced hereby are subject to a Voting Agreement dated as of [date] (a copy of which may
be obtained from the issuer), and by accepting any interest in such shares the person accepting such
interest shall be deemed to agree to and shall become bound by all the provisions of said Voting
Agreement.
11. Remedies
Each Shareholder will be entitled to enforce its rights under this Agreement specifically, to recover
damages by reason of any breach of any provision hereof and to exercise all other rights existing in its
favor. Each Shareholder agrees and acknowledges that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and that each Shareholder may, in its sole
discretion, apply to any court of law or equity of competent jurisdiction for specific performance in addition
to injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement.
12. Notices
Any notice required or permitted to be given to a party pursuant to the provisions of this Agreement shall
be in writing and shall be effective upon personal delivery or upon deposit in the U.S. mail, registered or
certified, with postage prepaid and clearly addressed to the party to be notified. Mailed notices shall be
addressed to (i) the Investors at their respective addresses set forth on Schedule I attached hereto, and
(ii) the Employee Shareholders at their respective addresses set forth on Schedule II attached hereto.
13. Severability
Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be
effective and valid under applicable law, but if any provision of this Agreement shall be held to be
prohibited by or invalid under applicable law, such provision shall be effective only to the extent of such
prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of
this Agreement.
14. Governing Law
This Agreement shall be governed by and construed under the laws of the State of [state] as applied to
contracts between [state] residents entered into and to be performed entirely within the State of [state].
15. Counterparts
This Agreement may be executed in two or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same instrument.
16. Entire Agreement
This Agreement constitutes the entire agreement of the Shareholders with respect to the subject matter
hereof and supersedes all prior agreements and undertakings, both written and oral.
17. Further Agreements
Each of the Shareholders shall execute such documents and take such further actions as may be
reasonably required or desirable to carry out the provisions of this Agreement and the transactions
contemplated hereby.
18. Assignment
This Agreement shall not be assigned by operation of law or otherwise without the prior written consent of
the other party hereto.
19. Parties in Interest
This Agreement shall be binding upon the heirs, legatees and devisees, executors, administrators, legal
representatives, successors and assigns of the Company and the Shareholders. Nothing herein, either
express or implied, is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement. Nothing in this Agreement shall be construed to create
30
any rights or obligations except among the parties hereto, and no person or entity shall be regarded as a
third-party beneficiary of this Agreement.
20. Interpretation
The parties hereto acknowledge and agree that: (i) each party and its counsel have reviewed and
negotiated the terms and provisions of this Agreement and have contributed to its revision; (ii) the rule of
construction to the effect that any ambiguities are resolved against the drafting party shall not be
employed in the interpretation of this Agreement; and (iii) the terms and provisions of this Agreement shall
be construed fairly as to all parties hereto and not in favor of or against any party, regardless of which
party was generally responsible for the preparation of this Agreement.
21. Amendment; Waiver
This Agreement may not be amended or modified except by an instrument in writing signed by the parties
hereto. The terms and provisions of this Agreement may be waived, or consent for the departure
therefrom granted, only by written document executed by the party entitled to the benefits of such terms
or provisions. No such waiver or consent shall be deemed to be or shall constitute a waiver or consent
with respect to any other terms or provisions of this Agreement, whether or not similar. Each such waiver
or consent shall be effective only in the specific instance and for the purpose for which it was given, and
shall not constitute a continuing waiver or consent.
22. Access to Information
From time to time upon request of any partner, designee or officer of any Investor so long as such
Investor holds any equity securities of the Company representing at least [percent] of the Investor's
Shares initially owned by such Investor, the Company will furnish to such partner, designee or officer, and
their representatives (including without limitation their accountants and legal counsel), such information
regarding the business of the Company and its subsidiaries (including materials furnished to the directors
of the Company and its subsidiaries at or in connection with board meetings) as such partner, designee or
officer may reasonably request. Each such partner, designee or officer, and their representatives
(including without limitation their accountants and legal counsel), shall have the right during normal
business hours and upon reasonable notice to make an independent examination of the books and
records of the Company and any of its subsidiaries, to make copies, notes and abstracts therefrom, and
to discuss their business, affairs and financial condition with the officers and accountants of the Company.
Each such representative will sign a confidentiality agreement, in a form reasonably acceptable to the
Investors, if so requested by the Chief Executive Officer or the Board.
23. Option: Irrevocable Proxy
If requested by [percent]-in-interest of the Investors, the Employee Shareholders shall deliver their
irrevocable proxies in favor of a designated representative of the Investors with respect to the matters set
forth herein and providing that the designated representative may vote the Employee Shareholders'
Shares by virtue of such proxy in the manner set forth herein.
IN WITNESS WHEREOF, this Agreement has been duly executed on the date hereinabove set forth.
[name of corporation]
By: [name]
President
EMPLOYEE SHAREHOLDERS:
[names and signatures]
INVESTORS:
[names and signatures]
31
Schedule I: Investors
Investor Name and Address
[name and address]
[name and address]
[name and address]
No. and Type of Shares Owned
[no. and type of shares]
[no. and type of shares]
[no. and type of shares]
Schedule II: Employee Shareholders
Employee Name and Address
[name and address]
[name and address]
[name and address]
No. and Type of Shares Owned
[no. and type of shares]
[no. and type of shares]
[no. and type of shares]
NOTES
Recitals
The recitals describe the background for the agreement. In this case, the general terms of the
financing are described, and a statement is included to the effect that the voting agreement is a material
consideration to the investors' decision to make the investment in the company. Obviously, changes can
be made to cover other situations, such as when the company has only two shareholders or is owned by
two family groups.
1. Shares Subject to Agreement
This paragraph identifies the shares to be covered by the agreement. The agreement covers all the
shares owned by the parties, as well any shares which are issued in the future in exchange or substitution
for such shares. This means that common shares issued to the investors upon conversion of the
preferred shares may be covered by the agreement, so long as the agreement remains in effect when the
conversion occurs. The language also implies that transferees of the shares will also be bound by the
terms of the agreement. Finally, since the goals and objectives of the agreement would be thwarted by
any dilutive issuance's of shares to parties not covered under the terms of the agreement, the company
has agreed not to issue any additional shares unless the new shareholder agrees to become a party to
the agreement. In some cases, an exception will be carved out for the issuance of very small amounts of
shares, as might occur when shares are issued to non-key employees; however, even in those cases,
persons or entities who will eventually own more than a specified percentage of the outstanding shares
(e.g., 1%) will be required to execute the agreement.
1.1. Investors' Shares
This provision sets out the definition of the shares held by the investors which are to be covered by
the terms of the agreement. In many cases, investors will be issued preferred shares that will be
convertible into common shares. In that situation, the definitional language might be expanded to make it
clear that the term “Investors' Shares” includes the preferred stock and any common shares issued upon
conversion of such preferred shares.
1.2. Employee Shareholders' Shares
This provision sets out the definition of the shares held by the employee shareholders which are to be
covered by the terms of the agreement. Employees rarely received preferred shares. So, in most cases, it
will be common shares that are covered by the agreement. In drafting stock option agreements for shares
32
to be issued to employees in the future, counsel should include a reference to this agreement which
makes it clear that shares issued to employees upon exercise of options will be subject to the voting
restrictions.
1.3. Shares Acquired in Future by Parties
While the provisions above clearly cover shares held by the parties at the time that the agreement is
first executed, it is clear that the effectiveness of the agreement depends on whether or not shares
acquired by the parties in the future will be covered. That is the purpose of this provision, which makes it
clear that all shares of capital stock of the company acquired by the parties over the term of the
agreement will be covered by the agreement. Appropriate amendments to each of the schedules should
be required in order to maintain a current record of voting restrictions.
1.4. Future Issuance's of Company Shares
In a closely-held business, the parties may not anticipate that a substantial number of additional
shares will be issued in the future. However, in the case of a start-up company looking to raise two or
three rounds of financing, conceivably a substantial number of shares may be issued in the future, often
to persons or entities who are not parties to the original agreement. Again, in order for the voting
arrangement to be effective, it should cover a sufficient number of subsequently-issued shares to make
the decision-making process among the parties to the agreement “definitive” with respect to matters
covered by the agreement. For example, it doesn't make much sense for the parties to determine how
they will vote with respect to the election of directors if one or more shareholders who are not parties to
the agreement control enough votes to override that determination.
The basic form calls for all subsequent shareholders to become parties to the agreement by
executing and delivering the accession agreement attached. The form of accession agreement is included
in these materials as master form at § 11:146. This is probably the preferred method to insure the
effectiveness of the agreement; however, counsel may recommend that the requirement for adding new
parties be limited to persons or entities who acquire a specified minimum number or percentage of
shares. See Alternative Clause 1.4 § 11:85 This avoids the need to get extra paperwork from small
shareholders, each of which would also be entitled to various notices under the terms of the agreement
whenever a vote is scheduled.
1.4. Alternative: Holders of Minimum Percentage of Shares
In order to keep the shareholder group to a manageable number, counsel may often recommend that
only persons acquiring a significant number of shares be required to become a party to the agreement.
For example, the agreement may provide that only holders of at least 1% of the outstanding shares be
required to execute the agreement, and this number may be even larger depending on the ownership
percentages of the original parties. To illustrate, if one or two of the shareholders own 40% each of the
outstanding capital stock, it probably makes sense to increase the minimum percentage to 5%, since a
1% shareholder (or even a group of 5 holders of 1% of the shares) is unlikely to be able to make a big
impact on decision-making.
1.5. No Partnership Relationship
This provision is included to make it clear that while the shareholders have entered into an agreement
to establish a process for joint decision-making regarding the business of the company, it is not their
intent to form a partnership or agency relationship. Moreover, the parties want to make it clear that their
contractual obligations are limited to those set out in the agreement and do not extend to any other
business purpose.
2. Designations of Directors
As a general rule, the election of directors will follow the principles of “one share-one vote,” unless
some other provision as to the election of directors is included in the charter documents. Some, but not
33
all, states automatically provide for cumulative voting in the election of directors, thereby assuring that
holders of less than a majority of the voting shares will be able to elect some representatives to the board
of directors. In other states, such as Delaware, cumulative voting with respect to the election of directors
is only available if it is actually provided for in the certificate of incorporation.
Most corporate statutes will permit the parties to deviate from the “one share-one vote” rule by
providing for class voting with respect to the election of directors. This will be accomplished by including
appropriate provisions in the charter documents and by creating a voting agreement similar to this one.


The parties may agree that the investors voting as a separate class will initially have the right to
designate a certain number of directors and that the remaining directors will be designated by the
holders of the common stock voting as a separate class.
In other cases, the investors and the employees, voting as separate classes, will be entitled to
designate an equal number of directors and the remaining director or directors will be elected by
both groups voting together.
Whenever a class voting provision is used, covenants should be included elsewhere in the charter
documents which prevent the company from changing the size of the board of directors without the
consent of the investors and/or the employee shareholders.
In deciding whether to utilize one of the alternative procedures for the election of directors,
consideration must be given to the objectives of the investors, the relationship that exists between the
investors and members of the management group, and the anticipated future financing requirements of
the company.


In situations where the investors are purchasing a majority interest in the company, they may, as
a result of the operation of statutory voting provisions, have the right to elect all of the directors.
Recognizing that it is probably desirable to take a balanced approach to board representation, the
investors may agree to a class voting scheme which assures them of the right to retain control of
the board while allowing one or more members of the management team to also serve as
directors.
In any case, the procedures regarding representation on the board of directors will always be
heatedly negotiated when the company raises additional funds in future equity financings.
The basic provision in this form is fairly typical of arrangements used by start-up companies obtaining
venture capital financing. It provides that the investor group and the employee-shareholder group will
each have a right to designate an agreed number of directors, and that both groups acting together must
agreement on one or more independent directors. Within the investor group, one or more investors have
been given special rights to designate a nominee to the board. This right is generally reserved to the lead
investors.
Under subsection (c), a “Designating Shareholder” will forfeit its rights to designate a nominee to the
board if it no longer owns at least one-half (1/2) of the shares purchased in the financing. A Designating
Shareholder is permitted to make distributions to its affiliates without losing its rights, and may even have
its rights restored if its holdings increase back up to the minimum required level.
Of course, the concept of a “Designating Shareholder” can be used for the employee-shareholder
group as well.


For example, the right to designate employee-shareholder group nominees may be vested in a
group of management shareholders. See Alternative 1.
Additionally, the form can easily be adapted for a closely-held corporation with two shareholders
or distinct groups of shareholders. I
If the parties don't wish to provide for an independent director, that language can easily be deleted.
Also, procedures for shifting the balance of control upon the occurrence of certain events should be
considered. See Alternative 2.
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2. Alternative 1: Designation by Management Group
This alternative is a variation on the basic form that consolidates control over the voting of the
employee-shareholder group in the hands of a smaller group of senior employees, referred to herein as
the “Management Group.” After beginning with a provision that establishes the total number of directors
which may be designed by employee shareholders, the agreement provides that one of those seats will
always be filled by the chief executive officer of the company, regardless of the number of shares held by
that person. Then, the remaining designees will be determined by the managers, with voting rights being
allocated in relation to their vested ownership of common shares. So, if a person is subsequently added
as a member of the Management Group by virtue of his duties and responsibilities, his or her authority will
be somewhat limited by the fact that he or she may not have served long enough to have his or her
shares vest appreciably.
2. Alternative 2: Change of Control Upon Default
If the investors are not initially given the right to designate a majority of the board of directors, they
may bargain for the ability to assume control of the board of directors upon the occurrence of certain
events specified in the charter documents. The triggers for these “vote switch” provisions, which are
referred to by that name since they effectively switch control over the company's affairs from existing
management to the investors, are always the subject of intense negotiations.


In some cases, changes in control may be limited to situations in which the company fails to
make a required redemption, defaults its obligations to make a dividend payment, or becomes
involved in insolvency or bankruptcy proceedings.
The parties may specify additional events, including a default by the company under any
covenants contained in the charter documents, or the company's failure to satisfy specific
financial tests.
Vote switch provisions generally set out the procedures to be followed upon the occurrence of an
event of default, including the requirement that the company notify the preferred shareholders of the
particular event.



Once notice has been delivered, a meeting of the shareholders is convened, or an action by
written consent is taken, in order to reconstitute the board of directors.
Once the new directors have been elected, they generally will continue to serve in that manner
under the event of default has been cured, at which point the special rights granted to the
investors under the vote switch provisions will terminate.
If there is any subsequent event of default, then the vote switch provision will come into effect
once again.
As a practical matter, once the investors assume control over the board of directors, they are
essentially placed in a position to influence whether or not the company takes the actions which may be
required in order to cure the particular event of default which led to the vote switch. As such,
representatives of management may wish to impose some standard of conduct upon the representatives
of the investors with respect to the manner in which they carry out their duties (e.g., “best efforts to cure
the event of default”). In turn, the investors may well argue that the occurrence of certain events, such as
insolvency of the company or the commencement of bankruptcy proceedings with respect to the
company, are sufficient to establish that management cannot effectively manage and operate the
business and, as such, the vote switch should be permanent.
3. Election of Directors
This paragraph binds all the parties to cast their shares for the election of the nominees designated in
accordance with the procedures in Section 2. This provision may well become important in situations
35
where the investors have converted some of their shares into common stock, and the investors will also
be obligated to vote their common shares as specified in Section 2.
As mentioned in the introduction, a voting agreement will sometimes only cover shares owned by the
common shareholders, and those types of agreements will obligate the common shareholders to vote
their shares in the manner specified by the investors. Such an agreement may be necessary when the
preferred shares are not granted separate class voting rights, but are simply relying on the fact that their
“as-if-converted” interest in the company is large enough to entitle them to elect a certain number of
members of the board of directors. If, for some reason, the ownership interest of the investors is diluted,
they might want to rely on the voting agreement as a means for compelling the common shareholders to
vote some portion of their shares for the designated nominees of the investors.
4. Conduct of Board Actions
At the same time that decisions are being made regarding designation and election of directors,
consideration should be given to the procedures to be followed by the board in taking actions on behalf of
the company. This basic provision sets the number of votes that would normally be required to approve
actions at the board level and adopts the customary majority vote rule. The language also provides that
“interested director” transactions relating to the investors must be approved only by those designees who
have not been nominated by the investors. This is an area where the parties often choose to provide that
certain actions at the board level will require a special vote, particularly in the case of fundamental
matters that materially impact the structure and business of the corporation. See Alternative Clause 4.
4. Alternative: Special Vote on Fundamental Matters
This alternative provision addresses the voting requirements for approval of certain matters at the
board level. Specifically, it defines a number of “fundamental matters,” including liquidation and
dissolution of the company and amendment of the charter documents, and then sets out a separate vote
or consent requirement (typically unanimous consent or a supermajority votes that assures that a majority
of the representatives from both groups are in agreement). This list is illustrative and the parties are, of
course, free to add more items or limit the provisions to specific events.
The provision also includes a procedure for mandatory discussions among the representatives of
each group in the event that they cannot reach agreement initially.


This dispute resolution procedure is particularly useful for closely-held corporations, and the
shareholders thereof may wish to consider formal arbitration as a last resort to break a deadlock.
Alternatively, the parties may provide that the “consequences” will include automatic dissolution
and liquidation of the corporation or the right of one or both parties to “put” their shares to the
other party.
5. Voting on Other Matters
While the primary purpose of the main text of this agreement is to determine how directors will be
elected by the shareholder group, some parties will extend the scope of the agreement to cover matters
which may come before the shareholders. If that is not desired, the drafter should simply use the main
text which makes it clear that all other matters relating to voting will be governed by the charter
documents and applicable corporations law provisions. If shareholder voting will be part of the agreement,
the parties may select from a wide range of alternatives, such as:



A requirement that both shareholder groups, by a vote of a specified percentage in interest of the
members of the particular group, must consent to certain matters; See Alternative 1.
A provision that vests one shareholder group with the authority to decide certain matters, such as
whether or not to accept a proposal that will result in a change in control of the company; See
Alternative 2 or
A requirement that one shareholder group (i.e., the investors) must approve certain actions by a
supermajority vote. See Alternative 3.
36
5. Alternative 1: Consent of Both Groups Required
This provision, often used by shareholders of closely-held corporations, requires that each
shareholder group must consent to listed actions. The parties are free to list the actions that are to be
covered by this provision. In cases where there are more than one shareholder in a group, the provision
should specify the decisionmaking process within the group. This provision also sets out a procedure for
resolving shareholder impasses. The parties may choose the appropriate remedy, such as binding
arbitration or put-call provisions.
5. Alternative 2: Change of Control Transactions
When the company receives financing from outside investors, the investors may want to retain the
right to direct decisions that impact their liquidity. This provision accomplishes this objective by providing
that employee shareholders must vote their shares as directed by the investors whenever there is a vote
on a merger, sale of assets, or other change-in-control transaction.
5. Alternative 3: Supermajority Vote of Investors Required
Another method used by investors to exercise control over the company is the use of so-called
supermajority vote provisions. Basically, such provisions restrict the company's ability to take certain
actions without obtaining the consent of more than a majority-in-interest of the investors. In effect, the
investors have a veto power over the listed actions; however, they are not in a position to force the
company to take actions which have not been approved by the appropriate percentage of holders of the
common shares. Points of negotiation include:


The actions covered by the requirement; and
The percentage of the investor group which must approve the transaction.
In setting the percentage, consideration must be given to the relative shareholdings of the major
investors, and it is common to set the percentage at a level which requires that two or more of the lead
investors (but not necessarily all) approve the action.
6. Dividends
While this agreement substantially impacts the voting rights associated with the shares held by the
parties, this provision makes it clear that the agreement does not impact the shareholders' economic
rights, such as the right to receive dividends and other distributions. Restrictions on distributions must be
drafted to conform with applicable state corporations laws and should be set out in articles of
incorporation (e.g., dividend and liquidation preferences for preferred shares).
7. Restrictions on Transfer
While detailed transfer restrictions are not included in this form, they may be used as a supplemental
device to control changes in the ownership group of the company. This section includes a general
restriction on transfer without compliance with procedures set out in another document, such as bylaws, a
separate buy-sell and/or transfer restriction agreement, or a stock purchase agreement between the
company and the investors. If a separate agreement does not exist, the parties might want to consider
including transfer restrictions in this agreement or, at a minimum, making it clear that transfers of shares
covered by the agreement are not permitted unless the transferee agrees to become a party to this
agreement.
8. Termination
Shareholders' agreements will usually terminate upon the earlier of a public offering by the company
or the expiration of a stated period of time (e.g., 10 years). In this case, the agreement also will terminate
37
when no shares of a designed class of securities, usually preferred shares issued to investors, remain
outstanding. When such a provision is used, consideration must be given to the possibility that it still
makes sense for the group voting provisions to remain in effect even if all shareholders own common
shares if the company has not yet achieved other milestones, such as a public offering. Of course, if there
is only one class of shares outstanding, this termination provision should be eliminated.
9. Representations and Warranties
Each shareholder, regardless of whether he, she, or it is an investor or an employee, should be
prepared to make some basic representations regarding their right and ability to enter into the agreement.
9.1. Absence of Violation
This so-called “no conflict” representation requires that shareholders represent that they are not
obligated under any other agreement which might impact the subject matter of this agreement. Of
particular interest is any earlier voting agreement or proxy arrangement which might need to be
terminated in order for this agreement to become effective.
9.2. Binding Obligation
This representation is designed to insure that the agreement is enforceable against each of the
shareholders. Inability to enforce a voting agreement against a party can have significant consequences,
and some lawyers counsel their clients to demand a voting trust arrangement to provide further assurance
that the voting arrangement will be recognized and enforced.
10. Legend Required
State corporations laws generally provide that stock certificates representing shares which are
subject to restrictions on transferability or voting arrangements must include a conspicuous statement to
that effect on the face of the certificate. Unless the statement or legend appears on the stock certificate,
the restrictions are not enforceable against a transferee of the shares who does not have actual
knowledge of the restriction.
11. Remedies
Since damages may not be an adequate remedy in the event that a party breaches its covenants
regarding voting of shares, the parties have agreed that specific performance should always be available
for violations of the agreement, as well as injunctive relief. In some cases, the investors may seek some
further protection by requesting that the common shareholders deliver their irrevocable proxies in order to
allow them to vote the common shares in the manner provided in the agreement.
12. Notices
Notice provisions generally cover the manner in which notices are to be delivered under the
agreement, as well as the locations to which notices should be sent.
13. Severability
The severability provision is intended to insure that the agreement will continue to be enforceable
even if one of its provisions is found to be invalid.
14. Governing Law
The legality and enforceability of the voting agreement is generally determined under the laws of the
state in which the corporation has been incorporated, and counsel should carefully review all relevant
statutory and case law before drafting a voting agreement. In some cases, a determination may be made
38
that another form of voting arrangement, such as a voting trust or irrevocable proxy, may be necessary
under applicable law in order to insure the desired result.
15. Counterparts
Since it is generally difficult to gather all the parties to the voting agreement in one place, provision
should always be made for the use of counterpart signature pages.
16. Entire Agreement
The agreement should contain a provision which clearly states, if true, that the agreement is intended
to be the full and entire understanding and agreement between the parties with regard to the subject
matter. This type of provision reduces the risk that some term or provision described in the term sheet
was intended to bind the parties. If the shareholders are already subject to some form of stock restriction
or option agreement, or the bylaws deal with voting, the drafter should insert appropriate language to
make it clear that the terms of this agreement supersede any earlier or conflicting language in the other
agreements or the bylaws.
17. Further Agreements
While this is intended to serve as a comprehensive voting agreement, provision will usually be made
for executing further documents which may be necessary to carry out the essential purpose of the
agreement. Documents might include certificates to be delivered to third parties that acknowledge that the
agreement is in place, proxies, and letters of instruction.
18. Assignment
This section compliments the restrictions on transferability (§ 11:98) associated with the shares
covered by the agreement by making it clear that the rights and obligations associated with this
agreement may not be assigned without appropriate consent.
19. Parties in Interest
This paragraph makes it clear that the agreement will continue to be binding on successors of the
parties, as well as any transferees of shares covered by the agreement. This is a key protection, and the
company is obligated not to recognize any transfer of the shares until the transferee has agreed to
become a party to the agreement. As this amounts to a restriction on transfer of the shares, an
appropriate legend (§ 11:103) must be placed on each of the share certificates.
20. Interpretation
This provision regarding interpretation and construction of the agreement is designed to make it clear
that all parties to the agreement participated in drafting and negotiation and that ambiguities should not be
resolved against the party which had primary responsibility for drafting. Moreover, it is important to recite,
if true, that all parties have had an opportunity to have the agreement reviewed by counsel. This is
important since courts may be reluctant to enforce voting provisions in situations where a party agreed to
what appears to be an unfavorable restriction without benefit of advice from counsel.
21. Amendment; Waiver
Procedures for amending the voting agreement should always be included. In this case, amendments
and waivers may only be effective if they are approved by all parties to the agreement. If a number of
shareholders are party to the agreement, it may be best to allow amendment by less than all of the
shareholders so long as the hurdle is set high enough (e.g., two-thirds in interest of all shareholders or a
majority-in-interest of the members of both shareholder groups).
39
22. Access to Information
In order for voting rights to be meaningful and informed, shareholders must have access to
information regarding the company's business. This provision sets up a procedure which allows investors
(and their representatives and agents) to:


Obtain financial information regarding the company; and
Visit the company's facilities to inspect records and meet with the company's officers and key
employees
These special information rights may be limited to only major investors; however, all shareholders
have certain statutory rights to information about the company and its business.
23. Option: Irrevocable Proxy
While voting agreements are generally recognized as enforceable, one or more shareholders may
want further assurances that shares held by other shareholders will be voted in the manner contemplated
under the agreement. One method for providing comfort is to require that specified shareholders deliver
an irrevocable proxy which allows the holder of the proxy to vote the shares as required under the
agreement. This optional provision calls for employee shareholders to deliver an irrevocable proxy to
representatives of the investor group. Of course, the provision can be varied to cover closely-held
corporations with just two or three shareholders.
Schedule I: Investors
A detailed list of the investors should be included as a schedule to the agreement. The following
information should be included:


The name and address of each of the investors; and
The number and type of shares owned by each investor.
Schedule II: Employee Shareholders
A detailed list of the employee shareholders should be included as a schedule to the agreement. The
following information should be included:


The name and address of each of the employees; and
The number and type of shares owned by each employee.
40
VOTING TRUST AGREEMENT — MASTER FORM WITH COMMENTARY
Source: Gutterman, Business Transaction Solutions (BUSTRANSOL §11:121)
Overview:
This voting trust agreement contemplates a voting agreement among subscribers to the capital stock
of a corporation. The agreement refers to the shareholders as subscribers but contemplates that they
enter into the agreement when they own their shares of the corporation's capital stock. Some of the
parties may prefer that the parties enter into the agreement before any of them actually acquires the
stock. In that case, counsel will need to alter Recital A and the tense of the verbs in Section One of the
agreement accordingly.
Shareholders of course may desire to enter into voting trust agreements at later times, after the
corporation has been operating. This may be particularly relevant when the corporation is contemplating a
major organizational transaction that involves the issuance of additional shares of stock or when one
shareholder is contemplating selling his or her block of stock to an “outsider.” Sometimes some (but not
all) shareholders desire to enter into a voting trust agreement; this is perhaps most often the case when
the shareholders desiring the agreement hold in the aggregate a majority of the total shareholder voting
power. This version of the agreement lends itself to relatively easy modification to accommodate either of
these situations.
This version of the agreement implicitly contemplates that the corporation has only one class of
capital stock. Counsel may find this version easily adaptable to other cases, and especially to the typical
cases in which:



The corporation has more than one class of common stock but all the common stock has identical
voting powers and votes together as one class;
The corporation also has (or in the future may have) preferred stock outstanding but the preferred
stock has limited voting rights; or
The agreement is among only the holders of the corporation's preferred shareholders.
Shareholders may enter into a voting agreement without establishing a voting trust. The voting
agreement alone simply establishes a contractual arrangement of rights and obligations among the
parties with respect to their voting. A breach of the voting agreement may entitle an aggrieved party to
contractual remedies; the shareholder vote may have been valid under applicable corporate law,
however, and the aggrieved party's remedies under the voting agreement may not affect or undo the
effect of the vote on the business and affairs of the corporation.
A voting trust agreement, in contrast, establishes a trust mechanism and effects a change in record
ownership of the stock. By these mechanisms the parties seek to implement controls that will preclude the
possibility of a vote by any party that would violate the parties' voting agreement.
Other documents necessary in connection with a voting trust agreement include voting trust
certificates and stock powers. This version of the voting trust agreement sets out the form of voting trust
certificate in Section Two of the agreement.
If the agreement is among subscribers for the corporation's capital stock, the voting trust agreement
may be a condition and exhibit to, or be incorporated as a part of, a shareholders' agreement among the
same investor parties.
The applicable state's corporate law may contain specific provisions authorizing, and may impose
requirements or limitations upon, voting agreements, voting trust agreements and the voting trust
trustees. Counsel will want to augment or amend this version of the voting trust agreement accordingly to
the extent necessary.
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This version of the agreement contemplates three voting trustees. Depending upon the nature and
extent of the authority or discretion the agreement gives to the trustees, the shareholder parties may
believe that one or two trustees will be sufficient.
This agreement is made on [date], between the holders of capital stock of [name of corporation], a
corporation organized under the laws of [state], herein called the “subscribers”, and [name of voting
trustee], [name of voting trustee], and [name of voting trustee], the trustees, herein called the “voting
trustees”. The principal office of the corporation is located at [address]. The addresses of the abovenamed voting trustees are as follows: [addresses of voting trustees].
The addresses of the subscribers and the number of shares owned by each are as follows:
[name]
[name]
[name]
[shareholder's residence]
[shareholder's residence]
[shareholder's residence]
[number of shares]
[number of shares]
[number of shares]
Recitals
A. Each of the subscribers represents that it is owner of the number of shares of capital stock of [name
of corporation], herein called the corporation, set opposite its name.
B. The subscribers deem it to be in the best interest of the corporation and of all the shareholders
thereof that this agreement be made.
For the above reason and in consideration of the agreements herein and other good and valuable
consideration, receipt of which is hereby acknowledged, the parties hereto provide and agree as follows:
1. Transfer of Stock to Voting Trustees
Each of the subscribers agrees that it will forthwith deposit with the voting trustees, or with their
authorized agents, the certificate or certificates for its shares of the capital stock, together with proper and
sufficient instruments duly executed for the transfer thereof to the voting trustees, and pending the
delivery of such instruments, each subscriber hereby sells, assigns, and transfers unto the voting trustees
the number of shares of stock of the corporation set opposite the subscriber's name.
2. Voting Trust Certificates
Upon deposit by any subscriber of a certificate or certificates for shares of capital stock hereunder,
accompanied by instruments of transfer thereto, the voting trustees will deliver or procure to be delivered
to such subscriber on the subscriber's order a voting trust certificate or certificates for the same number of
shares of capital stock of the corporation as is represented by the certificate or certificates therefor so
deposited, which voting trust certificates to be delivered on deposit of capital stock shall be substantially
in the following form:
No. [number]. [number] Shares of [name of corporation]
CAPITAL STOCK VOTING TRUST CERTIFICATE
This certifies that there has been deposited with the undersigned as voting trustees under the voting trust
agreement hereinafter mentioned, a certificate or certificates for [number] shares of the capital stock of
[name of corporation], a [state] corporation, and that [name], the registered holder, or the registered
holder's assigns, is entitled to all the benefits and interests specified in the voting trust agreement arising
from the deposit of the shares, all as provided in and subject to the terms of the voting trust agreement to
which reference is hereby made. Until termination of the voting trust agreement, the registered holder
hereof or assigns is entitled to receive payments equal to the amount of the cash dividends, if any,
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collected by the undersigned voting trustees or their successors in the trust upon the above-mentioned
number of shares of capital stock of the corporation. Until the voting trustees shall have delivered the
stock held by them under the voting trust agreement to the holders of voting trust certificates or to an
agent or to the corporation as specified in the voting trust agreement, and subject to the terms thereof, the
voting trustees, or their successors in the trust, shall possess and shall be entitled to exercise all rights
and powers of every nature of absolute owners of the capital stock, including the right to vote thereon
and/or to execute consents with respect thereto, by a vote of a majority thereof, it being expressly
stipulated that, except as in the voting trust agreement otherwise provided, no voting right passes to the
above-named owner hereof or its assigns by or under this certificate or by or under any agreement
expressed or implied.
This certificate is issued under and pursuant to, and the rights of the holder hereof are subject to and
limited by, the terms and conditions of a certain voting trust agreement dated [date], between holders of
capital stock of the corporation and [name of voting trustee], [name of voting trustee], and [name of voting
trustee], and successors, as voting trustees, duplicates of which are filed with the voting trustees and with
the corporation.
Unless sooner terminated as therein provided, the voting trust agreement shall terminate on [date].
This certificate is transferable only with the consent of all the voting trustees and then only on the books
of the voting trustees by the registered holder hereof in person or by attorney duly authorized according to
rules established for that purpose by the voting trustees and on surrender hereof. Until so transferred, the
voting trustees may treat the registered holder as owner hereof for all purposes whatsoever.
This certificate shall not become valid unless signed on behalf of the voting trustees by their duly
authorized agent.
In witness whereof, the voting trustees have hereunto set their hands on [date].
[name of voting trustee]
[signature of voting trustee]
[name of voting trustee]
[signature of voting trustee]
[name of voting trustee]
[signature of voting trustee]
[name of subscriber]
[signature of subscribers]
3. Agent of Voting Trustees
The [name of bank], located at [address], herein sometimes called the agent, is hereby appointed agent
of the voting trustees. As such agent, it shall hold the share certificates deposited hereunder, subject to
the board of trustees, and shall execute trust certificates on behalf of the trustees, act as transfer agent of
the trustees, keep suitable transfer books for the trustees, and otherwise act as their agent under special
instructions. The trustees may, at any time and in their discretion, and from time to time on written notice
to the agent, revoke its authority as agent and appoint another agent. The agent shall at all times be
protected in acting by written instructions of the voting trustees.
The agent of the voting trustees shall incur no liability as such to the voting trustees for anything done or
permitted at the request or direction of the voting trustees in the exercise of their powers under this
agreement, the stock deposited hereunder being intended to be wholly at the order and under the control
of the voting trustees. The agent shall incur no liability whatsoever except for its own misconduct or
neglect. The agent shall be protected in acting on any notice, request, consent, assignment, power of
attorney, or other instrument, believed by it to be genuine and to have been signed by the proper party or
parties. The agent shall be entitled to reasonable compensation for its services, and to be paid all
reasonable expenses in connection with the performance of its duties hereunder. The cost and expenses
are to be borne by the holders of voting trust certificates pro rata to their respective interests.
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4. Transferability of Voting Trust Certificates
The voting trust certificates shall be transferable as therein provided, and not otherwise, and transfers so
made of any such certificates shall vest in the transferee all rights and interests of the transferor in and
under such certificate, and on such transfer, the voting trustees will deliver or cause to be delivered the
voting trust certificate or certificates to the transferee of the same number of shares of capital stock called
for by the voting trust certificate so transferred. Until such transfer, the voting trustees may treat the
registered holder of a voting trust certificate as owner thereof for all purposes whatsoever. Every assignee
or transferee of a voting trust certificate issued hereunder shall, by the acceptance of such a voting trust
certificate, become a party hereto with like effect as though an original subscriber hereof.
5. Stock in Name of Voting Trustees
The shares of capital stock of the corporation, certificates for which shall be deposited hereunder with the
voting trustees, shall be vested in the voting trustees and shall be transferred to the name of the voting
trustees on the books of the corporation.
6. Voting Trustees Succeed to All Rights in Stock
Until the actual delivery by the voting trustees to the holders of voting trust certificates of the capital stock
of the corporation or until the voting trustees shall have delivered the stock of the corporation held by
them to the agent or to the corporation as provided hereinafter, the voting trustees, or a majority of them,
shall possess and in their discretion shall be entitled to exercise in person or by their nominee, all rights
and powers of absolute owners in respect of all the stock of the corporation held by them, including the
right to vote thereon and to take part and consent to any corporate or shareholders' action of any kind
whatsoever and to receive dividends and distributions on the stock. In addition, except as herein
provided, it is expressly understood and agreed that the holders of voting trust certificates shall not have
any right with respect to any such stock held by the voting trustees to vote or take part in or consent to or
in any way control or limit any corporate or shareholders' action. The voting trustees' right to vote shall
include the right to vote for election of directors and in favor of or in opposition to any resolution or
proposed action of any character whatsoever which may be presented in any meeting requiring the
consent of shareholders of the corporation.
7. Election of Board of Directors
Until this voting trust agreement shall be terminated as herein provided, the voting trustees hereunder
shall vote the stock deposited hereunder to effect the election of and to continue in office a board of
directors of the corporation which shall consist of [board specifications].
8. Dividends
The registered holders of voting trust certificates shall be entitled, until distribution of the stock of the
corporation deposited hereunder as provided for hereinafter, to receive from time to time payments equal
to the cash dividends, if any, collected by the voting trustees upon the like number of shares of capital
stock of the corporation represented in such voting trust certificates. In case certificates for any shares of
capital stock of the corporation shall be issued to the voting trustees as stock dividends upon the stock of
the corporation held by them hereunder, they shall hold such stock and the certificates representing it
subject to the provision of this agreement; but the registered holder of each voting trust certificate then
outstanding shall be entitled to receive from the voting trustees, voting trust certificates for the number of
shares received by the voting trustees as the stock dividend on shares represented by his voting trust
certificates. In the event that any dividend or other distribution other than cash or stock of the corporation
shall be received by the voting trustees, the voting trustees may in their discretion distribute the same
ratably among the holders of voting trust certificates in accordance with their respective shares or may
issue such certificates or other evidences of interest therein as to the voting trustees may seem advisable
or may hold the same until the termination of this agreement.
9. Termination of Voting Trust
On [date], unless the voting trustees exercise their right, which is hereby expressly granted to them, to
terminate this agreement by unanimous vote at any time prior to that date, the voting trustees shall
distribute the stock of the corporation held by them to the holders of the voting trust certificates as follows:
44
The voting trustees shall, upon presentation and surrender on or after such date of voting trust certificates
accompanied by properly executed transfers thereof to the voting trustees, deliver or cause to be
delivered to the holders of outstanding voting certificates, the stock of the corporation held by the voting
trustees in the amounts represented by the interests therein of the holders of the voting trust certificates.
On or after the termination of this agreement as above provided, the voting trustees may deposit with the
agent, or with the corporation, the stock of the corporation held by them hereunder, with properly
executed transfers thereof and instructions to distribute the same to the registered holders of such voting
trust certificates in the manner above provided, and they shall thereupon be relieved and discharged from
all further obligation and liability hereunder.
10. Method of Voting Stock
Except with respect to election of directors, the voting trustees shall at all shareholders' meetings vote the
stock represented by the respective outstanding voting trust certificates in accordance with the direction
of the respective holders thereof. The voting trustees may in all matters act either at a meeting or by a
writing or writings with or without a meeting.
11. Resignation of Trustees and Filling Trustee Vacancies
The number of voting trustees shall be [number]. In every case of death, resignation, or incapacity of a
voting trustee, the vacancy so occurring shall be filled in the following manner: The vacancy will be filled
by the appointment made by a majority of the remaining voting trustees or by a single remaining trustee,
as the case may be, by a written instrument, a copy of which shall be deposited with the corporation at its
principal office in [state]. If all trusteeships become vacant, the subscribers will elect new voting trustees
by a majority vote, with each subscriber having a proportionate number of votes to the number of voting
trust certificates held by it for each of the three trusteeships. The voting will be cumulative. Each
successor trustee shall from the time of such appointment be deemed a voting trustee hereunder and
have all the estate, title, rights, and powers of a voting trustee hereunder. All acts and instruments shall
be done and executed which shall be necessarily or reasonably requested for the purpose of effecting
such succession and of making the voting trustees as they shall exist upon such appointment the owners
of record of the stock deposited with the voting trustees. Until the appointment of a successor, the
remaining voting trustees shall have all the estate, title, rights, and powers of the original voting trustees.
The voting trustees from time to time in office, may adopt, use, and issue voting trust certificates bearing
the names of their predecessors or any of them.
12. Voting Trustees' Proxies
The voting trustees may vote stock of the corporation in person or by such persons as they shall select as
their proxy.
13. Voting Trustees Liability for Negligence
In voting the shares of stock or doing any act with respect to the control or management of the
corporation or its affairs, as holders of the stock deposited hereunder, the voting trustees shall exercise
their best judgment in the interest of the corporation, and to the end that its affairs shall be properly
managed. No voting trustee shall be liable for any error of judgment or mistake of law or other mistake, or
for anything save only the trustee's willful misconduct or gross negligence.
14. Resignation of Voting Trustees' Agent
The agent of the voting trustees may at any time resign its duties hereunder by giving [number] days'
notice thereof to the voting trustees, and such agent may at any time be removed by a written instrument
signed by at least a majority of the then voting trustees and delivered to the agent. In case of a vacancy in
the position of agent, a majority of the voting trustees, by a writing signed by them and delivered to the
successor named therein, may appoint a successor to the agent, which successor shall thereupon be
entitled to all rights, authority, and powers hereby conferred upon the above-named agent. The agent so
resigning or so removed shall thereupon deliver to such successor, the stock of the corporation held by it
hereunder, together with all books, registers, and other papers pertaining or relating to the stock or the
voting trust certificates which may from time to time be issued hereunder.
15. New Subscribers
45
Any holder of capital stock of the corporation may at any time become a subscriber hereto with respect to
any such stock by subscribing to this agreement and depositing the certificates of his or her stock,
accompanied by duly executed instruments of transfer as herein provided.
16. Notice
Any notice to be given to the holders of voting trust certificates hereunder shall be sufficiently given if
mailed to the registered holders of voting trust certificates at the addresses furnished respectively by such
holders to the voting trustees or their agent.
17. Lost Trust Certificates
In case any trust certificate issued under this agreement shall become mutilated, destroyed, stolen, or
lost, the voting trustees, in their discretion, may authorize the issue of a new trust certificate; and
thereupon the agent of the trustees shall issue a new trust certificate in substitution therefor for a like
number of shares and bearing a like serial number. The applicant for such substituted trust certificate
shall furnish to the trustees and to their agent evidence to their satisfaction, respectively, of the mutilation,
destruction, theft, or loss of such trust certificate, together with such indemnity to both the trustees and/or
their agent, respectively, as, in their discretion, they may require.
18. Voting Trustees Dealing with Corporation
The voting trustees shall not be disqualified by their office from dealing or contracting with the corporation
either as vendor, purchaser, or otherwise, nor shall any transaction or contract of the corporation be void
or voidable by reason of the fact that any voting trustee or any firm of which any voting trustee is a
member or any corporation of which any voting trustee is a shareholder or director, is in any way
interested in such transaction or contract; nor shall any voting trustee be liable to account to the
corporation or to any shareholder thereof for any profits realized by, from, or through any such transaction
or contract by reason of the fact that the voting trustee, or any firm of which the voting trustee is a
member, or any corporation of which the voting trustee is a shareholder or director, was interested in such
transaction or contract.
19. Amendment of Voting Trust
This agreement may be amended or terminated at any time by an instrument in writing duly executed and
acknowledged by the owners and holders of trust certificates representing a majority of the shares of
stock of the corporation having voting power.
20. Execution of Voting Trust Agreement
This agreement shall bind and benefit the executors, administrators, assigns, and successors of the
respective parties hereto and may be simultaneously executed in any number of counterparts, each of
which, when so executed, shall be deemed to be an original; and such counterparts together shall
constitute one instrument. An original of this agreement shall be placed with the agent of the trustees, and
a duplicate thereof shall be filed with the corporation at its principal office in [state].
21. Acceptance of Trust by Voting Trustees
The voting trustees hereby accept the above trust subject to all of the terms, conditions, and reservations
herein contained, and agree that they will exercise their powers and perform their duties of voting trustees
as herein set forth; provided, however, that nothing herein contained shall be construed to prevent any or
all of the voting trustees from resigning and discharging themselves from the trust.
In witness whereof, the parties hereto have respectively signed this voting trust agreement on [date].
[name of voting trustee]
[signature of voting trustee]
[name of voting trustee]
46
[signature of voting trustee]
[name of voting trustee]
[signature of voting trustee]
[name of subscriber]
[signature of subscriber]
NOTES
Recitals
If the parties enter into the agreement before they pay for and acquire the corporation's capital stock,
counsel will want to alter paragraph A accordingly. Counsel may wish to augment or alter paragraph B to
set out the purposes or concerns behind the agreement.
1. Transfer of Stock to Voting Trustees
This section provides for the transfer of the capital stock from the shareholder parties to the trustees.
Counsel may prefer to specify precisely what documents will be required as the “proper and sufficient
instruments duly executed for the transfer.” Such specificity helps to avoid confusion or debate at the time
of transfer, and individuals who are not particularly familiar with the mechanics of transfers of securities
usually find such precise description instructive and helpful. Typically the required instruments of transfer
are “stock powers duly endorsed in blank.”
If the shareholder parties already own the stock, counsel may wisely suggest that the agreement
require the shareholders to deliver their stock certificates and powers when they execute the agreement.
The portion of this section from “and pending” to the end of the section then may not be necessary.
Counsel will need to revise the text of this Section One if uncertificated securities are involved.
2. Voting Trust Certificates
The shareholder receives a voting trust certificate from the trustees in exchange for the stock he or
she places into the trust. The voting trust certificate thus is somewhat analogous to a stock certificate, in
that it represents the holder's rights to the voting trust.


The voting trust certificate identifies the registered holder of the certificate and the number of
shares of stock the holder delivered to the trustee in exchange for the certificate.
The typical certificate also summarizes or describes the fundamental rights (and obligations, if
any) of the holder in the trust and under the trust agreement; it also refers to the agreement and
states where one may examine or obtain a copy of the agreement.
If the agreement imposes restrictions on the transfer of the certificates, the restrictions or clear
references to them should set forth conspicuously on the certificate. If other applicable law does not
provide guidance as to what constitutes adequate notation of such restrictions, counsel may find guidance
in the applicable jurisdiction's law about transfer restriction notations on stock certificates.
This version of the agreement sets forth the form of voting trust certificate as part of the text of the
agreement. Some counsel find it mechanically preferable to present the form of certificate as an exhibit to
the agreement.
3. Agent of Voting Trustees
This version of the agreement contemplates that an agent shall hold the stock certificates, issue the
voting trust certificates and otherwise act on behalf of and at the direction of the voting trust trustees. In
47
appropriate situations, the shareholders may determine that the trustee(s) may hold the trust and perform
their duties in their own right and do not need to incur the services and expenses of an agent.
4. Transferability of Voting Trust Certificates
Counsel often prefer to set all restrictions on transfer out fully in the agreement. This version of the
agreement and certificate give the trustees absolute discretion whether to approve or disapprove any
proposed transfer of a voting trust certificate. Counsel may wisely suggest either that the agreement set
out principles to guide or limitations upon the exercise of that discretion or that any transfer require the
approving vote of a majority of the shareholders who are not proposing to transfer their certificates. Such
vote might by on the basis of one vote per certificate holder or of one vote for each share of corporation
stock represented by such holder's voting trust certificates.
Counsel may wish to provide in this section that an new voting trust certificate will be issued to the
transferee only upon surrender of the transferor's certificate. Many agreements will require that the
transferee actually sign a copy of the voting trust agreement and may make such signing a condition
precedent to the issuance of the transferee's voting trust certificate.
Transfer restrictions should be noted on the voting trust certificates (§ 11:124).
5. Stock in Name of Voting Trustees
Some states' statutes suggest that the stock certificates must be surrendered to the corporation and
reissued in the name of the trustees.
6. Voting Trustees Succeed to All Rights in Stock
This section expressly gives the trustees all voting and other rights with respect the shareholder
parties' stock in the corporation, subject to the constraints or obligations imposed upon the trustees by
Sections Seven, Eight and Ten, and other provisions, of the voting trust agreement.
7. Election of Board of Directors
The blank in this form of the Section may be filled in with whatever names, phrases or sentences
record the shareholder parties' simple or complex agreement. The agreement may be, for example,
specific names, a limitation on the number constituting the entire Board and a list of certain individuals
who must be directors (but not necessarily constitute the entire Board), or reference to such persons as a
certain or a specified group of people name from time to time.
8. Dividends
The typical voting trust agreement pertains to only a shift in shareholder voting rights, not to any
ultimate shift in the shareholders' economic interests in the corporation's stock. Their economic interest is
indirect during the life of the trust, however, because the trustees become the record owners of the stock.
This section address this issue and the mechanics for preserving and distributing the shareholder parties'
realized economic benefits from the corporation's capital stock.
Counsel may wish to clarify in this section whether or not the trustees are entitled to deduct agent and
trustee fees and other expenses of the trust and to distribute to the shareholder parties only the remaining
net amount of dividends received.
9. Termination of Voting Trust
This version of the agreement entitles the trustees to terminate the voting trust agreement by
unanimous vote. Many shareholders prefer to keep that power to themselves alone; in that instance,
counsel will want to delete the applicable portion of the introductory sentence of this Section and perhaps
to insert a reference to Section Nineteen of the agreement.
48
Some state's corporate laws limit the permissible or enforceable duration of a voting trust agreement
unless it is expressly renewed or extended by the parties at the end of the permitted or enforceable time
period.
10. Method of Voting Stock
This version obligates the trustees to vote the stock as the respective beneficial owners direct, except
when voting to elect directors of the corporation. The trustees thus may be obligated to split the total vote
in many instances.
Some voting trust agreements may carve other shareholder votes out from this general voting
provision. Votes often treated differently in a voting trust agreement include issues of mergers or sales of
significant assets and issues affecting the corporation's capital structure (e.g., increases in the number of
authorized shares of stock).
11. Resignation of Trustees and Filling Trustee Vacancies
Many shareholders prefer to retain for themselves the right to fill vacancies in trusteeships and not to
give that power to the remaining trustees. Counsel may wish to clarify that when voting to fill a trustee
vacancy, each voting trust certificate holder shall have a number of votes equal to the number of shares
of corporation stock represented by the voting trust certificates held of record by that shareholder, if that is
what the parties intend. Many voting trust agreements do not provide that voting by the certificate holders
will be cumulative. Counsel may wish to add to this Section that a successor trustee becomes a trustee
only upon his, her or its acceptance of the trusteeship and signing of a copy of the voting trust agreement.
12. Voting Trustees' Proxies
This Section reiterates a power granted to the trustees by Section Six (§ 11:128) of the agreement.
13. Voting Trustees Liability for Negligence
This Section limits the trustees' liability to liability for willful misconduct or gross negligence. Although
high, such standard for trustee liability is typical. In fact, institutional trustees often will not agree to act as
a trustee if the threshold for liability would be lower.
14. Resignation of Voting Trustees' Agent
This Section of course may be eliminated if the agreement does not authorize the trustees to engage
an agent (§ 11:125).
15. New Subscribers
New parties to the agreement could be persons or entities who owned shares of the corporation's
stock, but did not join in the agreement, when the other parties to the agreement entered into the
agreement. Or the new parties may have acquired their stock at a later time, by acquiring newly issued or
treasury shares from the corporation or by acquiring shares from a shareholder who did not enter into the
agreement.
16. Notice
Counsel may wish to add that such notices will be deemed given only a specified number of days
after they are mailed with postage prepaid.
17. Lost Trust Certificates
This Section is substantively similar to the typical corporate by-law provision regarding lost stock
certificates.
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18. Voting Trustees Dealing with Corporation
Shareholders reasonably may have some concern about, and want in some way to limit, the scope of
this Section if the trustees have any discretion in the exercise of their authority. This concern may be
especially appropriate if the trustees have any discretion in determining how to vote the corporation
shares.
19. Amendment of Voting Trust
The phrase “a majority of the shares of stock of the corporation having voting power” proposed in this
version of the agreement may be appropriate if all outstanding shares of the corporation will be held
under the agreement at all times during the life of the voting trust agreement. If that may not be the case,
and perhaps for the sake of caution in any event, counsel may find it prudent to replace that phrase in this
version with the phrase “a majority of the shares of the corporation then deposited with the trustees under
this agreement.” Many voting agreements require a super-majority vote ( e.g., a two-thirds, three-quarters
or even unanimous vote) to approve an early termination of the agreement.
20. Execution of Voting Trust Agreement
This Section sets out “binding effect” and “counterparts” provisions typical to most contracts, as well
as certain mechanical requirement unique to the voting trust agreement.
21. Acceptance of Trust by Voting Trustees
This Section records the trustees' agreement to act under and in accordance with the agreement,
subject to their rights to resign as such trustees.
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IRREVOCABLE PROXY
Source: Gutterman, Business Transaction Solutions (BUSTRANSOL §11:151)
Overview:
This form is the irrevocable proxy to be used in connection with the shareholders' agreement. The
proxy grants the president the right to vote the shares of the other shareholders on all but the matters
listed in the proxy and in the shareholders' agreement. Reference is also made to the form of employment
agreement, which sets out the duties of the president, including the matters as to which the president has
full authority without the need to consult the other shareholders.
The undersigned Shareholders, holders of the number of shares indicated opposite their signatures of
common stock of [name of corporation] (the “Company”), irrevocably appoint and constitute [name]
(“President”) as their attorney and proxy to attend meetings, vote, give consents, and in all other ways to
act in their place and stead until [date]. President shall have full power of substitution and revocation and
any proxies heretofore given are hereby revoked.
This proxy is made and executed in consideration of the purchase by President of stock of the Company,
execution of the Shareholders' Agreement dated [date], by and between President and the undersigned
Shareholders, and the Employment Agreement dated [date], between the Company and President,
providing for a period of employment from [date], to and including [date].
President shall have complete discretion to vote the shares under this Irrevocable Proxy as to any matter
requiring a vote of Shareholders, except that the written consent of holders of a majority of the
outstanding shares of the Company shall be obtained by President to approve any of the following actions
by the Company:
(a) Amendment or repeal or alteration in any way of any provision in the Articles of Incorporation or
Bylaws of the Company;
(b) Merger or consolidation of the Company;
(c) Transfer of all or substantially all of the assets of the Company;
(d) Issuance of any shares of the Company or issuance of any options or other rights to acquire any
shares of the Company (except up to [percent] of the Company's outstanding stock pursuant to an
employee stock option plan); or
(e) Issuance of any bonds, debentures, notes or evidences of indebtedness of the Company (other than
to trade creditors in the ordinary course of the Company's business).
Any additional shares issued to the Shareholders, or any of them, shall be subject to this Irrevocable
Proxy and such certificates shall be affixed with a legend so indicating. This Proxy shall become
revocable upon the later to occur of (i) the expiration of the period of employment under the Employment
Agreement, or (ii) when President no longer owns any stock of the Company.
Dated: [date]
No. of Shares Subject to this Irrevocable Proxy: [number]
[names and signatures of shareholders]
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STOCKHOLDERS' AGREEMENT FOR MANAGEMENT AND INVESTOR
GROUPS
Source: Gutterman, Business Transaction Solutions (BUSTRANSOL §11:152)
Overview:
This form of stockholders' agreement was used in connection with the preferred stock purchase
agreement. The transaction involved a management buyout of a division of a large pharmaceutical
company which was financed, in part, by venture capital funding. The stockholders' agreement sets out
the agreement between the management group and the investor group as to election of directors and also
contains detailed procedures to be followed whenever a party seeks to transfer shares outside of his, her
or its specific group. In addition, the agreement covers offers by third parties to acquire control of the
corporation and provides that the parties will be bound by the will of the majority as to acceptance of the
terms of any such offer.
STOCKHOLDERS' AGREEMENT dated as of [date], among [name of corporation], a [name of state]
corporation (the “Corporation”), and those stockholders of the Corporation listed on Schedule I attached
hereto (collectively, the “Stockholders”).
The Corporation is a corporation duly organized and existing under the laws of the State of [name of
state] with an authorized capitalization of [number] shares of Common Stock, without par value (the
“Common Stock”), and [number] shares of Convertible Preferred Stock, without par value (the “Preferred
Stock”). Each of the Stockholders owns that number of shares of Common Stock or Preferred Stock set
forth opposite the name of each such Stockholder on Schedule [number/letter] attached hereto. It is
deemed to be in the best interests of the Corporation and the Stockholders that provision be made for the
continuity and stability of the business and policies of the Corporation and, to that end, the Corporation
and the Stockholders hereby set forth their agreement with respect to the shares of Common Stock and
Preferred Stock owned by the Stockholders.
NOW, THEREFORE, in consideration of the premises and of the mutual consents and obligations
hereinafter set forth, the parties hereto hereby agree as follows:
SECTION 1. Definitions
As used herein, the following terms shall have the following respective meanings:
(a) Affiliate shall mean a person that directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, any Stockholder.
(b) Eligible Group shall mean any Group except a Selling Group or a Group which includes a Stockholder
as to whom or which an Event of Option shall have occurred.
(c) Event of Option shall mean the occurrence of one or more of the following events:
(i) a Stockholder shall be declared bankrupt or a receiver, executor, administrator, guardian, legal
committee or other legal custodian of his or its property (including any Stock owned by such
Stockholder) shall be appointed; provided, however, that no appointment of any executor or
administrator of the property of a Stockholder who is an individual, upon the death of such
Stockholder, shall be deemed an Event of Option as to any Stock owned by such Stockholder
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until and unless such executor or administrator, or any successor thereof, shall have disposed of
such Stock other than by transferring it to a member or members of the Group of such
Stockholder, which member or members shall have agreed in writing, at the time of such transfer,
to be bound by and to comply with, to the same extent as the Stockholder as a result of whose
death such Stock was distributed, all applicable provisions of this Agreement and to be deemed a
member of such Stockholder's Group;
(ii) a Stockholder shall Sell any Stock in violation of Section 2, 3, 5 or 6;
(iii) a Stockholder who became a Stockholder only by virtue of being an Affiliate ceases to be an
Affiliate (in a manner other than as contemplated by Section 1(c) (i)) while it owns any Stock; or
(iv) a writ of attachment or levy or other court order shall prevent a Stockholder from exercising his or
its voting and other rights with respect to any Stock.
An Event of Option shall be deemed to be continuing until the procedures set forth in Section 4 with
respect to the Stock affected thereby have been exhausted.
(d) Fair Value Per Share shall mean, as of the date of determination, the fair value of each share of
Stock determined in good faith by a majority of the Board of Directors of the Corporation or, if such
determination cannot be made, by a nationally recognized independent investment banking firm
mutually selected by Stockholders holding not less than a majority in voting power of the then
outstanding Stock and the Stockholder as to whom or which an Event of Option shall have occurred
(or, if such selection cannot be made, by a nationally recognized independent investment banking
firm which is selected by the American Arbitration Association in accordance with its rules).
(e) Group shall mean:
(i) In the case of any Stockholder who is an individual, (A) such Stockholder, (B) the spouse,
parents, siblings and lineal descendants of such Stockholder, (C) a trust for the benefit of any of
the foregoing and (D) any corporation or partnership controlled by such Stockholder;
(ii) In the case of any Stockholder which is a partnership, (A) such partnership and any of its limited
or general partners, (B) any corporation or other business organization to which such partnership
shall sell all or substantially all of its assets or with which it shall be merged and (C) any Affiliate
of such partnership;
(iii) In the case of any Stockholder which is a corporation, (A) any such corporation and any of its
subsidiaries, (B) any corporation or other business organization to which such corporation shall
sell all or substantially all of its assets or with which it shall be merged and (C) any Affiliate of
such corporation; and
(iv) In the case of any Stockholder which is a trust, (A) such trust and (B) the beneficiaries of such
trust.
(f) Investors shall have the meaning ascribed thereto in the Purchase Agreement.
(g) Principals shall have the meaning ascribed thereto in the Purchase Agreement.
(h) Prohibited Transferee shall mean any individual, corporation, firm or other legal entity receiving or
holding any Stock, directly or indirectly, as the result of the occurrence of an Event of Option.
(i) Proportionate Percentage shall mean the pro rata percentage of a class of Stock (A) being offered by
a Selling Group pursuant to Section 3 which each Eligible Group shall be entitled to purchase, if any,
or (B) which each Eligible Group shall be entitled to purchase from the Stockholder as to which an
Event of Option has occurred, his or its representatives or assigns, or the Prohibited Transferee, as
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the case may be. Such pro rata percentage, as to each Eligible Group, shall be the percentage figure
which expresses the ratio, based upon voting power, between the number of shares of outstanding
Stock owned by such Eligible Group and the aggregate number of such shares of Stock owned by all
Eligible Groups.
(j) Purchase Agreement shall mean the Convertible Preferred Stock Purchase Agreement dated as of
the date hereof, among the Corporation and the Stockholders.
(k) Sell, as to any Stock, shall mean to sell, or in any other way directly or indirectly transfer, assign,
distribute, encumber or otherwise dispose of, either voluntarily or involuntarily.
(l) Selling Group shall mean a Group of a Stockholder proposing to Sell its Stock, or which has delivered
a notice of intention to Sell, pursuant to Section 3.
(m) Stock shall mean (1) the presently issued and outstanding shares of capital stock of the Corporation,
(2) any additional shares of capital stock hereafter issued and outstanding and (3) any shares of
capital stock of the Corporation into which such shares may be converted or for which they may be
exchanged.
(n) Stockholders shall mean those persons identified on Schedule I attached hereto as the holders of
Stock and shall include any other person who agrees in writing with the parties hereto to be bound by
and to comply with all applicable provisions of this Agreement as contemplated by Sections 2(b) and
2(c).
SECTION 2. Limitations on Sales of Stock—General
Each Stockholder, and each member of the Group of such Stockholder, hereby agrees that he or it shall
not at any time during the term of this Agreement Sell any Stock except:
(a) by sale in accordance with Section 3, 4, 5 or 6;
(b) by pledge which creates a mere security interest in the Stock; provided, that the pledgee thereof shall
agree in writing in advance with the parties hereto to be bound by and comply with all applicable
provisions of this Agreement to the same extent as if it were the Stockholder making such pledge; or
(c) by transfer to another member of the Group to which such Stockholder belongs; provided, that the
recipient of such Stock shall agree in writing with the parties hereto to be bound by and to comply
with all applicable provisions of this Agreement and to be deemed a member of such Group.
SECTION 3. Procedures on Sale of Stock to Third Parties
Except as otherwise expressly provided herein, each Stockholder and each member of the Group to
which such Stockholder belongs hereby agrees that it or he shall not Sell any Stock except in accordance
with the following procedures:
(a) The Selling Group shall first deliver to the Corporation and each Eligible Group a written notice, which
shall be irrevocable for a period of [number] days after delivery thereof, offering all or any part of the
Stock owned by the Selling Group at the purchase price and on the terms specified therein,
whereupon (i) first, the Corporation shall have the right and option to purchase all of the Stock so
offered at the purchase price and on the terms stated in the notice of intention to Sell (such
acceptance to be made by the delivery of a written notice to the Selling Group and each Eligible
Group within the [number]-day period after delivery of the aforesaid notice of intention to Sell); and (ii)
second, if and only if the Corporation shall have failed to accept or shall have rejected in writing the
foregoing offer, each Eligible Group shall have the right and option (subject to the provisions of
Section 3(e)), to accept its Proportionate Percentage (but not less than its Proportionate Percentage)
of the Stock so offered at the purchase price and on the terms stated in the notice of intention to Sell
(such acceptance to be made by the delivery of a written notice to the Selling Group within the
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[number]-day period after the Corporation's failure to accept or rejection in writing of the foregoing
offer.
(b) If any Eligible Group shall fail to accept, or shall reject in writing, the offer made pursuant to Section
3(a), then, upon the earlier of the expiration of such [number]-day period or the receipt of written
notices of acceptance, or written rejections of such offer, from all Eligible Groups, the Selling Group's
then remaining Stock formerly subject to such offer shall be reoffered to the remaining Eligible
Groups, if any, which accepted their Proportionate Percentage of such offer. Such subsequent offer
shall be on the terms and subject to acceptance in the manner provided in Section 3(a), except that
the Eligible Groups receiving such subsequent offer shall have the further right and option to offer, in
any written notice of acceptance, to purchase any of such Stock not purchased by other Eligible
Groups, in which case such Stock not accepted by the other Eligible Groups shall be deemed to have
been offered to and accepted by the Eligible Groups which exercised their further right and option,
pro rata in accordance with their respective Proportionate Percentages, and on the above-described
terms and conditions.
(c) Sales of Stock under the terms of Sections 3(a) and (b) above shall be made at the offices of the
Corporation on a mutually satisfactory business day within [number] days after the expiration of the
aforesaid periods. Delivery of certificates or other instruments evidencing such Stock duly endorsed
for transfer to the Corporation or members of the Eligible Groups, as applicable, shall be made on
such date against payment of the purchase price therefor.
(d) If effective acceptance shall not be received pursuant to Sections 3(a) and (b) above with respect to
all or any part of the Stock offered for sale pursuant to the aforesaid written notice, then the Selling
Group may sell all or any part of the remaining Stock so offered for sale at a price not less than the
price, and on terms not more favorable to the purchaser thereof than the terms, stated in the written
notice of intention to Sell, at any time within [number] days after the expiration of the offer required by
Sections 3(a) and (b) above. In the event the remaining Stock is not sold by the Selling Group during
such [number]-day period, the right of the Selling Group to Sell such remaining Stock shall expire and
the obligations of this Section 3 shall be reinstated; provided, however, that in the event the Selling
Group determines, at any time during such [number]-day period, that the sale of all or any part of the
remaining Stock on the terms set forth in the written notice of intention to Sell is impractical, the
Selling Group can terminate the offer and reinstate the procedure provided in this Section 3 without
waiting for the expiration of such [number]-day period.
(e) The Selling Group may specify in the written notice of intention to Sell contemplated by Section 3(a)
that all Stock mentioned therein must be sold, in which case acceptances received pursuant to
Sections 3(a) and (b) hereof shall be deemed conditioned upon (i) receipt of written notices of
acceptance with respect to all Stock mentioned in such written notice of intention to Sell and/or (ii) the
sale of the remaining Stock, if any, pursuant to Section 3(d) above.
SECTION 4. Event of Option
(a) If an Event of Option shall occur, each Eligible Group shall have the right and option to give the
Corporation and the Stockholder (or his representatives or assigns) as to which such Event of Option
has occurred, or the Prohibited Transferee, as the case may be, notice of its election to have the Fair
Value Per Share determined, whereupon the Stockholders shall cause such determination to be
made with reasonable promptness. Upon the completion of such determination, each Eligible Group
shall have the right and option for a period of [number] days after such determination, to purchase
from such Stockholder, his representatives or assigns, or the Prohibited Transferee, as the case may
be, for cash, and at the Fair Value Per Share, its Proportionate Percentage (but not less than its
Proportionate Percentage) of the shares of Stock as to which such Event of Option has occurred,
which option shall be exercised by delivery to the Corporation, during such [number]-day period, of a
written notice of election to purchase such Stock, whereupon the Corporation shall forthwith transmit
any written notice of election to purchase delivered pursuant to this Section 4(a) to the Stockholder as
to which such Event of Option has occurred, its representatives or assigns, or the Prohibited
Transferee, as the case may be, but failure of the Corporation so to transmit any such notice shall in
55
no way invalidate such notice; provided, however, that the Eligible Groups delivering such notice of
election to purchase shall have the further right and option to purchase, in any such written notice of
election to purchase, any such Stock not purchased by other Eligible Groups, in which case such
Stock not accepted by the other Eligible Groups shall be deemed to have been offered to and
accepted by the Eligible Groups which exercised their option hereunder, pro rata in accordance with
their respective Proportionate Percentages, and on the above-described terms and conditions.
(b) Sales of Stock effected under the terms of Section 4(a) shall be made at the offices of the
Corporation on a mutually acceptable business day within [number] days after the expiration of the
period referred to in Section 4(a). Delivery of certificates or other instruments evidencing such Stock
duly endorsed for transfer shall be made on such date against payment of the purchase price
therefor.
(c) If any shares of Stock as to which an Event of Option shall have occurred shall not be purchased in
accordance with Section 4(a) for any reason other than failure of the owner thereof to comply with the
provisions of this Agreement, such Stock shall thereupon cease to be subject to this Agreement;
provided, however, that if such shares of Stock are thereafter acquired by a member of any Group,
they shall once again be deemed to be subject to this Agreement.
(d) So long as a Stockholder belonging to an Eligible Group complies with the provisions of this Section
4, the provisions of Section 3 shall not apply to the sale of Stock being effected pursuant to this
Section 4.
SECTION 5. Right of Co-sale
In the event any Stockholder or member of the Group to which such Stockholder belongs receives a bona
fide offer from a third party which is not an Affiliate (the “Section 5 Offeror”) to purchase from such
Stockholder or member of the Group of such Stockholder not less than 20% of the Stock owned by such
Stockholder or member of such Group for a specified price payable in cash or otherwise and on specified
terms and conditions (the “Section 5 Offer”), such Stockholder or member of such Group shall promptly
forward a copy of the Section 5 Offer to the Corporation and the other Stockholders. Each such
Stockholder or member of such Group shall not sell any such Stock to the Section 5 Offeror unless the
terms of the Section 5 Offer are extended to the other Stockholders on a pro rata basis (being the ratio,
based upon voting power, between the number of such shares owned by such Stockholder or member of
such Group and all Stockholders). Such other Stockholders shall have [number] days from the date of the
foregoing offer to accept such offer. Before the Stockholder or member of the Group who had received
the Section 5 Offer extends such Section 5 Offer to the other Stockholders pursuant to this Section 5,
such Stockholder or member of such Group shall first comply with the provisions of Section 3.
SECTION 6. Obligation to Purchase Stock
(a) In the event that after [date], (i) any Group or Groups receives a bona fide written offer from a third
party which is not an Affiliate to purchase not less than 50% of the then issued and outstanding Stock
of the Corporation or (ii) the Corporation receives a bona fide written offer from a third party which is
not an Affiliate (such third party which is not an Affiliate referred to in clause (i) or this clause (ii) being
hereinafter called the “Section 6 Offeror”) to consolidate or merge with any person (in a consolidation
or merger in which stockholders of the Corporation receive cash or securities of any other person
upon such consolidation or merger) or to sell or otherwise dispose of all or substantially all of its
property and assets as an entirety to any person, in each case for a specified price payable in cash or
otherwise in excess of [dollar] (non-cash consideration to be valued in good faith by the Board of
Directors of the Corporation) and on specified terms and conditions (the “Section 6 Offer”), such
Group or Groups or the Corporation, as the case may be, shall promptly forward a copy of the
Section 6 Offer to all the Stockholders and/or the Corporation, as the case may be.
(b) Each of the Stockholders shall notify the Corporation of his or its acceptance or rejection of the
Section 6 Offer within [number] days after receipt thereof. If Stockholders holding not less than a
majority of the then outstanding Stock accept the Section 6 Offer, each of the Stockholders shall
tender his or its Stock to the Section 6 Offeror in accordance with the terms of the Section 6 Offer or
56
the Corporation shall consummate the transaction as set forth in the Section 6 Offer, as the case may
be (it being understood, however, that in the event the Section 6 Offer referred to in clause (ii) of
Section 6(a) relates to a proposed statutory merger, consolidation or sale of all or substantially all of
the assets of the Corporation, the acceptance of such Section 6 Offer shall occur upon compliance
with the applicable statutory requirements of the state of incorporation of the Corporation and the
applicable requirements of the Corporation's Certificate of Incorporation in connection therewith). In
the event a Section 6 Offer referred to in clause (i) of Section 6(a) is for less than all the Stock, the
amount of Stock to be purchased by such Section 6 Offeror from each Stockholder shall be
determined on a pro rata basis based upon the percentage of the then outstanding Stock held by
such Stockholder.
(c) In the event Stockholders holding a majority of the then outstanding Stock do not accept the Section
6 Offer within the aforesaid [number]-day period, any Stockholder who has advised the Corporation in
writing of his or its intention to accept such Section 6 Offer (an “Accepting Stockholder”) shall have
the right to sell to the Corporation and the Corporation shall be obligated to purchase from the
Accepting Stockholder, the Stock (or the portion of the Stock which the Accepting Stockholder would
have been able to sell pursuant to the Section 6 Offer) held by such Accepting Stockholder at an
aggregate price, payable in cash, equal to the consideration that such Accepting Stockholder would
have received for such Stock had the Section 6 Offer been accepted and such Stock been disposed
of by such Accepting Stockholder pursuant thereto. The obligation of the Corporation to so purchase
such Accepting Stockholder's Stock shall commence upon receipt by the Corporation of written notice
from such Accepting Stockholder within [number] days of a final determination to the effect that such
Section 6 Offer is not to be accepted (or within [number] days of a final determination of the fair value
of the consideration payable to such Accepting Stockholder as contemplated by the next succeeding
sentence). If the consideration specified in the Section 6 Offer was stated in terms otherwise than in
cash, (i) the consideration payable to such Accepting Stockholder for such Stock shall be the fair
value thereof determined by a nationally recognized independent investment banking firm selected in
good faith by the Board of Directors of the Corporation (or if such selection cannot be made, by a
nationally recognized independent investment banking firm selected by the American Arbitration
Association in accordance with its rules), and (ii) such Acceptance Stockholder shall have no
obligation to sell its Stock as aforesaid until such fair value has been determined and such Accepting
Stockholder has offered its Stock to the Corporation.
(d) In the event the Corporation is unable, financially or as a matter of law, to purchase such Accepting
Stockholder's Stock as required by Section 6(c) hereof, each Stockholder of the Corporation who had
not indicated that he or it would accept the Section 6 Offer (a “Declining Stockholder”) shall be
obligated, severally but not jointly, to purchase his or its proportionate percentage of all Accepting
Stockholders' Stock as aforesaid, said proportionate percentage being the percentage figure which
expresses the ratio, based upon voting power, between the number of outstanding shares of Stock
owed by a Declining Stockholder and the aggregate number of outstanding shares of Stock owned by
all Declining Stockholders.
(e) So long as a Group or Groups comply with the provisions of this Section 6, the provisions of Section 3
shall not apply.
SECTION 7. Election of Directors
(a) Subject to Section 7(b), at each annual meeting of the stockholders of the Corporation, and at each
special meeting of the stockholders of the Corporation called for the purpose of electing directors of
the Corporation, and at any time at which stockholders of the Corporation shall have the right to, or
shall, vote for directors of the Corporation, then, and in each event, the Stockholders shall vote all
shares of Stock owned by them for the election of a Board of Directors consisting of the following
directors, designated in the following manner:
(i) three directors shall be designated by Investors holding 66-2/3% in voting power of the shares of
Stock then held by all Investors;
57
(ii) four directors shall be designated by the Principals; and
(iii) if the Board of Directors shall consist of more than seven directors, each of the directors in
excess of seven shall be a person who is neither an officer or an employee of the Corporation nor
an “affiliate” or an “associate” (as said terms are defined in Rule 405 promulgated under the
Securities Act of 1933, as amended), of any of the foregoing, including the Corporation, and shall
be designated by the Principals and be acceptable to Investors holding 66-2/3% in voting power
of the shares of Stock then held by all Investors.
The directors to be designated by the Principals shall be designated by Principals holding 66-2/3% in
voting power of the shares of Stock then held by all Principals.
(b) It is understood that (i) the directors which the holders of Preferred Stock, voting separately as one
class, are entitled to elect pursuant to the terms of the Certificate of Incorporation of the Corporation
are to be designated in the manner provided in Section 7(a) and (ii) the directors to be designated by
the Investors pursuant to clause (i) of Section 7(a) are, and are not in addition to, the directors that
the holders of Preferred Stock, voting separately as one class, are entitled to elect pursuant to said
Certificate of Incorporation; provided, however, that this Section 7 shall not be applicable so long as
an Event of Election under (and as defined in) the Certificate of Incorporation exists and is continuing.
SECTION 8. Legend on Stock Certificates
Each certificate of the signatories hereto representing shares of Stock shall bear the following legend,
until such time as the shares represented thereby are no longer subject to the provisions hereof:
THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES
REPRESENTED BY THIS CERTIFICATE AND/OR THE RIGHTS OF THE HOLDER OF SUCH
SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS ARE SUBJECT TO THE TERMS AND
CONDITIONS OF A STOCKHOLDERS' AGREEMENT DATED AS OF [date], AMONG [name of
corporation] AND CERTAIN HOLDERS OF OUTSTANDING CAPITAL STOCK OF SUCH
CORPORATION. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN
REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE TO THE SECRETARY OF
[name of corporation]
SECTION 9. Duration of Agreement
The rights and obligations of each Stockholder under this Agreement shall terminate as to such
Stockholder upon the earlier to occur of (i) the transfer of all Stock owned by the Group of which such
Stockholder is a member in accordance with this Agreement, (ii) on the ninth anniversary of the date
hereof or (iii) the consummation of an underwritten public offering of the Corporation's Common Stock
registered pursuant to the Securities Act of 1933, as amended, which results in the automatic conversion
of all shares of Preferred Stock into Common Stock pursuant to the terms of the Corporation's Certificate
of Incorporation.
SECTION 10. Severability; Governing Law
If any provision of this Agreement shall determined to be illegal and unenforceable by any court of law,
the remaining provisions shall be severable and enforceable in accordance with their terms. This
Agreement shall be governed by, and construed in accordance with, the laws of the State of [name of
state].
SECTION 11. Benefits of Agreement
This Agreement shall be binding upon and inure to the benefit of the parties and their respective
successors and assigns, legal representatives and heirs.
SECTION 12. Notices
All notices, advices and communications to be given or otherwise made to any party to this Agreement, or
to the Group of any such party, shall be deemed to be sufficient if contained in a written instrument
delivered in person or duly sent by first class registered or certified mail, postage prepaid, addressed to
58
such party at the address set forth below or at such other address as may hereafter be designated in
writing by the addressee to the addressor listing all parties:
If to the Corporation, to:
[name of corporation]
[address]
Attention: [name]
If to the Stockholders:
At their respective addresses set forth in Schedule I attached hereto
All such notices, advices and communications shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery and (b) in the case of mailing, on the third business day
following such mailing.
SECTION 13. Modification
Except as otherwise provided herein, neither this Agreement nor any provision hereof can be modified,
changed, discharged or terminated except by an instrument in writing signed by the party against whom
the enforcement of any modification, change, discharge or termination is sought or by the agreement of
holders of 66-2/3% in voting power of all shares of Stock subject to this Agreement: provided, however,
that no modification or amendment shall be effective to reduce the percentage of the shares of Stock the
consent of the holders of which is required under this Section 13.
SECTION 14. Termination of Prior Agreements
All prior Stockholders Agreements among the parties to this Agreement or any of them are hereby
terminated.
SECTION 15. Captions
The captions herein are inserted for convenience only and shall not define, limit, extend or describe the
scope of this Agreement or affect the construction hereof.
SECTION 16. Nouns and Pronouns
Whenever the context may require, any pronouns used herein shall include the corresponding masculine,
feminine or neuter forms, and the singular form of names and pronouns shall include the plural and viceversa.
SECTION 17. Merger Provision
This Agreement constitutes the entire agreement among the parties pertaining to the subject matter
hereof and supersedes all prior and contemporaneous agreements and understandings of the parties in
connection therewith.
SECTION 18. Counterparts
This Agreements may be executed in one or more counterparts, each of which shall be deemed to be an
original, but all of which taken together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above
written.
[name of corporation]
By: [name and signature]
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[title of office]
[name and signature]
[name and signature]
[name and signature]
[name and signature]
60