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8 OUT OF 10. There are technical challenges around craft- ing shareholders’ agreements. It’s also dif cult to persuade clients not to act spitefully and against their best interests. A good advisor will assist the other members of the client’s team to identify and prevent mistakes, like the one Jerrod made when he insisted on unequal salaries.
Shareholders’ agreement
Jordan Caplan, also a partner at Crowe Soberman, explains the shareholder’s agreement should cover terms and conditions, if Jerrod and Penelope stay in business together. It would also detail what would happen under various sale scenarios, if either Jerrod or Penelope dies or becomes dis- abled, or if either of them go bankrupt.
A shotgun clause is advisable, says Caplan.
If Penelope offers to buy Jerrod out, the clause requires that he either sell or buy her shares
at Penelope’s offer price. This keeps Penelope honest, because if she low-balls him, he can sim- ply refuse to sell and walk away with her shares at a major discount. Say Jerrod wants to retire early and has an outside buyer for his shares. If Penelope wants to keep going, she will rightly be concerned about who her new co-owners will be. The agreement covers that concern, says Caplan. “If she doesn’t approve, she’ll have the option to either buy Jerrod’s shares on the same terms and conditions the third party offered,
or sell her shares to the third party.” Jerrod and Penelope may both want to sell, but that doesn’t mean they’ll agree on what the best price is. For example, an outside buyer may offer $15 million. Penelope knows it’s a great price in a tough market and could want to close. But Jerrod could claim the price is too low.
A good shareholder’s agreement can help pre- vent such disputes from holding up a sale. It will include language requiring Jerrod and Penelope to make an effort to get the best price. It will also say, if they can’t agree on whether to accept an offer, the one who claims it’s too low must buy the other’s shares at the offered price. “The idea,” explains Maisel, “is that if it’s worth more, as you claim, you should be happy to buy me out at what you think is a discount.”
The agreement will also cover compensation, should Jerrod and Penelope continue as business partners. Caplan and Maisel say this could get complicated, given that Jerrod’s may be worth more to the company. When they were married and drawing $400,000 salaries, neither cared if the other was worth more or less. “That’s because it’s all going into the family pocket. But what happens if Jerrod were to say to Penelope, ‘I’m worth my $400,000—or more—but no company would pay you $400,000 for the job you’re doing.’ ”
Adds Caplan: “As important as the CFO is,
the reality is that business is about relationships, and with Jerrod being the face of the company, he could take customers or suppliers with him should he leave.” Jerrod could bring in a compensation specialist who might determine, for instance,
that he’s worth $500,000 and Penelope $300,000. Jerrod might then tell Penelope he’s prepared to continue with her only if she accepts these salaries.
Maisel warns this might not be the best course, even if the compensation specialist is right. That’s because Penelope could threaten to use the asym- metry as the basis for a spousal support 34
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