Managing Attorney
You and a co-founder split equity 50/50 over coffee, opened the business two years ago, and have been too busy to paper any of it. Now, one of you wants to bring on an investor, and the other wants to scale back hours, and there is no written rule for who decides what. Texas does not require a shareholder agreement, but every closely-held Texas business with more than one owner should put one in place before a dispute, exit, or deadlock forces the issue in court. A shareholder agreement defines voting power, buy-sell rights, and dispute resolution, while everyone still agrees on what is fair. A Houston business law attorney at Capstone Legal Strategies can help you build that structure now, instead of litigating without one later.
What Is a Shareholder Agreement Under Texas Law?
A shareholder agreement is a written contract among the shareholders of a corporation (and often the corporation itself) that governs how the business is managed, how shares are transferred, and what happens when an owner leaves. Texas Business Organizations Code §21.101 authorizes shareholders to enter into agreements that can:
- Restrict the discretion or powers of the board of directors
- Eliminate or limit the board and authorize shareholders or other persons to manage the business, in whole or in part
- Govern voting power, including disproportionate voting rights
- Determine how profits and losses are apportioned
- Authorize arbitration to resolve deadlocks
- Require winding up of the corporation on a specified event
To be enforceable under §21.101, the agreement must either be contained in the certificate of formation or bylaws and approved by all shareholders at the time, or set out in a written agreement that is signed by all shareholders at the time and made known to the corporation.
A separate provision, §21.714, gives close corporations even broader latitude, including buy-sell rights, transfer restrictions, and, together with §21.704, the ability to dispense with bylaws and operate without a board of directors For LLCs, the equivalent document is the company agreement (sometimes called an operating agreement). Many of the same considerations apply, just under different statutes.
When Should a Texas Business Have a Shareholder Agreement?
The short answer is as soon as the business has more than one owner. The longer answer is that certain situations make the absence of an agreement particularly risky, including but not limited to:
- Multiple founders. Even an even split among two co-founders requires a tiebreak mechanism. Without one, a 50/50 deadlock can paralyze the business.
- Outside investment. New investors will want clarity on voting rights, distributions, and exit terms before writing a check.
- Active and passive owners. When some shareholders work in the business and others do not, the rules for compensation, dividends, and decision-making need to be different.
- Family-owned businesses. Marriage, divorce, and inheritance can move shares to people who were never meant to be in the business. Transfer restrictions handle that.
- Plans to bring in employees as owners. Vesting, repurchase rights, and good-leaver/bad-leaver terms belong in writing before equity is granted.
The common thread is that each situation has the potential to create a dispute that the default rules in the Texas Business Organizations Code do not resolve in the way the owners would have chosen.
What Should a Shareholder Agreement Cover?
There is no statutory checklist, but a comprehensive agreement typically addresses:
- Management and decision-making: Who sits on the board, what decisions require shareholder approval, and how disputes get resolved
- Voting rights: Proportional, weighted, or class-based voting, plus tiebreak mechanisms
- Transfer restrictions: Right of first refusal, prohibited transferees, and consent requirements
- Buy-sell provisions: What triggers a buyout (death, disability, divorce, voluntary sale), how the price is set, and how the buyout is funded
- Drag-along and tag-along rights: What happens when a majority owner sells the company, and whether minority owners must come along or can join
- Distributions: How and when profits are distributed, including any preference for certain shareholders
- Confidentiality and non-competition: What shareholders can and cannot do during and after their involvement
- Dispute resolution: Alternative dispute resolution mechanisms such as arbitration or mediation, rather than leaving disagreements to default rules
The best agreement is the one tailored to the actual business, including the founders’ goals, the industry, the funding structure, and the realistic exit scenarios.
How Are Buy-Sell Provisions Funded?
Drafting a buy-sell provision is half the work. Funding is the other half. Common funding mechanisms include:
- Life insurance owned by the company or the other shareholders, used to fund a death-triggered buyout
- Disability insurance, used the same way for a disability-triggered buyout
- Installment payments from company cash flow over a defined period
- A sinking fund or reserve set aside specifically for buyouts
Without funding, even a well-drafted buy-sell can fall apart at the worst possible moment.
How Long Does a Shareholder Agreement Last?
Under §21.102 as amended in 2015, a shareholders’ agreement entered into on or after September 1, 2015, has no automatic expiration, any limit on its term must be expressly stated in the agreement itself. Agreements that were already in effect before September 1, 2015, remain subject to a 10-year duration unless the agreement provided otherwise.
For agreements drafted today, the practical takeaway is that if the parties want a defined term, they need to include one; silence means the agreement continues indefinitely. However, a shareholder agreement ceases to be effective if the corporation’s shares are ever listed on a national securities exchange (§21.109), a provision that matters primarily to companies on a path toward a public offering.
What Happens If You Do Not Have One?
Without a shareholder agreement, the default provisions of the Texas Business Organizations Code apply. That generally means majority rule, no transfer restrictions beyond those in the certificate of formation, no buy-sell mechanism, and no defined process for resolving deadlocks. Disputes that an agreement would have resolved by contract are instead resolved by default rules or, when those rules fall short, by whatever process the owners can agree to once a problem has already arisen.
Talk to a Houston Business Attorney About Shareholder Agreements
Shareholder agreements work best when they are drafted before they are needed. Capstone Legal Strategies, PLLC works with Houston-area business owners to put governance, transfer, and exit terms in writing while everyone is still aligned. Contact our office to schedule a consultation.