The Endless Shareholder Agreement

Congratulations to the Texas legislature for authorizing the Endless Shareholder Agreement.

Virtually every closely held private corporation should have a shareholder agreement to address, if nothing else, restrictions on transfer of the shares. Otherwise, you may find that one of your fellow shareholders has transferred his shares of the company's stock to the company's biggest competitor, or worse yet, your ex-wife!  Shareholder agreements are especially important for a corporation taxed as an S-corporation, because a transfer of shares to a person who is not eligible to be a shareholder of an S-corp can terminate the company's S-corp status and result in adverse tax consequences for the company's shareholders. Shareholder agreements can also address other issues, such as establishing a procedure for shareholders to buy or sell each other's shares (i.e., a buy-sell agreement), modifying shareholders' statutory voting rights or strengthening shareholders' information rights.

But for shareholder agreements adopted prior to September 1, 2015, there has been a trap for the unwary.  Under Section 21.102 of the Texas Business Organizations Code (TBOC),  shareholder agreements were only effective for ten years unless the agreement provided otherwise. Thanks to recently adopted S.B. No. 860, which amends Section 21.102 of the TBOC, however, the default assumption for shareholder agreements will flip on September 1, 2015.  Shareholder agreements adopted after that date will be effective forever unless the shareholder agreement provides otherwise. Shareholder agreements adopted before that date will continue to be subject to the 10-year limit under the prior law, unless the agreement provides otherwise.

The new law is probably more consistent with shareholders expectations and is therefore a step forward for Texas business law.