Every Maryland corporation is built on at least two documents: the charter (the articles of incorporation and any amendments filed with the State Department of Assessments and Taxation) and the bylaws. Many closely held corporations stop there. That works while the owners agree on everything. It stops working the first time an owner wants to sell, dies, gets divorced, stops showing up, or disagrees with the others about where the company is going.

A shareholder agreement fills that gap. It is a private contract among the owners, and usually the corporation as well, that addresses the owners’ relationship with each other rather than the mechanics of running the company. Maryland’s statute uses the word “stockholder” rather than “shareholder,” and the two terms mean the same thing. You will see both in this post.

How the documents differ

The bylaw amendment problem

Under Corporations and Associations Section 2-109, the board adopts the first bylaws at its organization meeting. After that, the power to adopt, alter, and repeal the bylaws belongs to the stockholders, except to the extent the charter or bylaws give that power to the board. Many form bylaws do exactly that. The practical result is that a protection written only into the bylaws can often be removed by whoever controls the board or a majority of the stock, which is usually the person a minority owner needs protection from.

A shareholder agreement is different because it is a contract. If the agreement says it can be amended only with the written consent of every party, or of each owner above a stated percentage, no majority vote can change it. That is the single most important reason a closely held corporation with more than one owner needs one.

Public companies rarely use shareholder agreements because their shares trade freely. The document matters for closely held corporations, where there is no market for the stock, the owners usually work in the business, and one owner’s decision to leave or sell affects everyone else. The most common situations:

• Two or more founders. Partners who start a corporation together need to decide now what happens if one of them leaves, dies, or wants out. Our guide on business partnership agreements covers the same questions from the partnership and LLC side.
• Family corporations. Ownership that passes between generations, to in-laws, or through estates creates the kind of disputes a shareholder agreement is designed to prevent.
• Key employees receiving stock. Granting shares to an employee without a buyback right on termination means a former employee can remain an owner indefinitely.
• Outside investors. An investor will usually ask for board seats, information rights, and approval rights over major decisions, and the founders will want transfer restrictions and a drag-along right in return.
• S corporations. Any corporation that has elected S status needs provisions that prevent a transfer from terminating the election. See the S corporation section below.
• A single owner planning to add another. A sole owner has no one to contract with yet, but the agreement should be in place before the second owner receives shares, not after.

If you are still choosing between a corporation and an LLC, start with our guides on choosing a business entity in Maryland and LLC versus corporation tax implications.

In a closely held corporation, the identity of your co-owners matters as much as the value of the stock. Without restrictions, an owner can sell shares to a competitor, a stranger, or someone the other owners would never have chosen. Transfer restrictions are the core of almost every shareholder agreement.

Common restrictions

• Consent requirement. No transfer without the approval of the board, the other stockholders, or a stated percentage of them.
• Right of first refusal. An owner who receives a bona fide offer from an outsider must first offer the shares to the corporation, the other owners, or both, on the same terms. If they decline, the owner may sell to the outsider within a set period on terms no better than those offered.
• Right of first offer. An owner who wants to sell must first offer the shares to the other owners at a price the owner names before looking for an outside buyer.
• Permitted transfers. Transfers to a family trust or estate planning vehicle, or to an entity the owner controls, are usually allowed, on the condition that the transferee signs the agreement and the shares remain subject to it.
• Pledge restrictions. A pledge of shares to a lender can end with the lender, or a foreclosure buyer, owning them. The agreement should address whether shares can be pledged and what happens on foreclosure.

The legend requirement

A transfer restriction that a buyer does not know about may not bind that buyer. Under Commercial Law Section 8-204, an issuer’s restriction on transfer, even if otherwise lawful, is ineffective against a person without actual knowledge of it unless the restriction is noted conspicuously on the stock certificate or, for uncertificated shares, the registered owner has been notified of the restriction. In practice, this means two things: every certificate should carry a legend referring to the shareholder agreement, and a corporation with uncertificated shares should send each owner written notice of the restrictions and keep a record that it did.

Close corporations have a statutory restriction

If the corporation has elected close corporation status, Maryland law imposes a transfer restriction of its own, discussed in the close corporation section below.

Most disputes among owners of closely held corporations begin with a change in someone’s life rather than a disagreement about the business. A shareholder agreement should identify the events that allow or require a buyout, set the price or a method for determining it, and explain how the purchase will be paid for. These provisions are often called buy-sell provisions, and they can sit inside the shareholder agreement or in a separate buy-sell agreement. Our guide on buy-sell agreements in Maryland covers the mechanics in more depth.

Triggering events

• Death. Without a buyout provision, the shares pass to the owner’s estate and then to heirs who may have no interest in or knowledge of the business. The surviving owners may want to buy the shares, and the family may want to be paid out. The agreement should state whether the purchase is mandatory or optional and for whom.
• Disability. Define disability precisely, usually by reference to an inability to perform duties for a stated period, and decide who determines it.
• Divorce. A divorce court may award shares, or their value, to a spouse. The agreement should give the corporation or the other owners the right to buy any shares transferred to a former spouse, and it is common to require each owner’s spouse to sign a consent acknowledging the agreement.
• Departure from employment. When an owner who works in the business quits or is terminated, the other owners usually want the shares back. Agreements often distinguish between a departure for cause, which may carry a discounted price, and other departures.
• Bankruptcy or a creditor’s levy. A provision allowing a buyout if an owner’s shares become subject to a bankruptcy, levy, or charging process keeps creditors from becoming co-owners.
• Retirement or voluntary exit. Some agreements give an owner a put right, meaning the right to require the corporation to buy the shares after a stated period, which gives a minority owner a way out of an otherwise illiquid investment.

Price and payment

The price provision causes more disputes than any other part of the agreement. The usual options are a fixed price updated periodically, a formula such as a multiple of earnings or book value, or an appraisal by an independent appraiser at the time of the event. A fixed price works only if the owners actually update it, and many do not. An appraisal requires the agreement to say whether discounts for a minority interest or lack of marketability apply, because that single choice can change the price substantially.

Payment terms matter just as much. Few closely held corporations can pay a departing owner’s full value in cash. The agreement should state whether the price is paid in installments, at what interest rate, what security the seller receives, and whether life or disability insurance funds the purchase. For an S corporation, the price provision also has tax consequences, discussed in the S corporation section.

Restrictive covenants

An owner who sells out may compete with the business the next day unless the agreement says otherwise. Non-competition, non-solicitation, and confidentiality covenants tied to the sale of an ownership interest are generally reviewed more favorably than employee non-competes, but they still must be reasonable in scope and duration. See our guides on non-compete agreements in Maryland and trade secret protection.

In a corporation, the stockholders elect the directors, and the directors manage the business. By default, whoever controls a majority of the vote controls the board and therefore the company. A shareholder agreement can change that allocation of power by contract.

Voting agreements

Maryland expressly authorizes stockholders to agree in advance on how they will vote. Under Corporations and Associations Section 2-510.1, two or more stockholders may enter into a written agreement providing that their shares will be voted as the agreement provides, as the parties later agree, or under a procedure the agreement sets out. The most common use is to guarantee each founder or investor a seat on the board: each party agrees to vote for the directors the others designate.

Reserved matters

Board seats alone do not protect a minority owner if the majority still controls the board. The stronger protection is a list of reserved matters, meaning decisions that require the approval of a supermajority of the stock or of each owner above a stated percentage. Typical reserved matters include:

• Issuing new shares or admitting a new owner
• Selling the company or substantially all of its assets, or merging
• Amending the charter, the bylaws, or the shareholder agreement
• Taking on debt or guaranties above a stated amount
• Changing owner compensation or entering into transactions with an owner or an owner’s affiliate
• Changing the nature of the business, filing for bankruptcy, or dissolving

If an owner serves as a director or officer and may face claims, our guide on indemnification in Maryland explains the protections that should be considered alongside the shareholder agreement.

Drag-along rights

A drag-along provision allows owners holding a stated percentage of the stock to require the remaining owners to join a sale of the company on the same terms. Buyers of closely held businesses usually want 100 percent of the stock, and a single holdout can block a sale or demand a premium. A drag-along right solves that problem. Minority owners typically negotiate conditions: the same price per share and form of consideration, limits on the representations and indemnities they must give, and a requirement that the buyer be unrelated to the majority.

Tag-along rights

A tag-along, or co-sale, provision protects minority owners when a majority owner sells. If the majority sells its shares to a buyer, the minority may include its shares in the sale on the same terms. Without it, a majority owner could sell control at a premium and leave the minority owning a small stake under a new controlling owner it never chose.

Preemptive rights

A preemptive right allows existing owners to buy a proportionate share of any new stock the corporation issues, so their ownership percentage is not diluted. Under Corporations and Associations Section 2-205, stockholders of a Maryland corporation incorporated on or after October 1, 1995 have no statutory preemptive rights unless the charter expressly grants them. Corporations incorporated before that date may have preemptive rights preserved under prior law unless expressly changed or terminated by charter amendment. Most owners assume they cannot be diluted without their consent, but that assumption is generally wrong for corporations formed on or after October 1, 1995 unless appropriate protections exist. A shareholder agreement can provide a contractual right to participate in new issuances, and it can make any new issuance a reserved matter.

These provisions matter most when the company is eventually sold. See our guides on how to sell a business in Maryland and asset sales versus stock sales.

A minority stockholder in a closely held corporation has limited leverage. There is no market for the stock, the majority controls the board, and the board decides whether to pay dividends, who is employed, and how much owners are paid. Maryland law provides some baseline protections, but they are limited and often require litigation to enforce.

Statutory inspection rights

Under Corporations and Associations Section 2-512, any stockholder may, on written or electronic request, inspect and copy the bylaws, minutes of stockholder proceedings, annual statements of affairs, and voting trust agreements. Under Section 2-513, one or more stockholders who together have held at least 5 percent of the outstanding shares of any class or series for at least six months have broader rights, including the right to inspect the books of account and stock ledger and to request a sworn statement of the corporation’s affairs. However, the statute generally excludes certain classes or series of non-common stock created or classified on or after October 1, 2020, unless the charter provides otherwise. Stockholders who do not satisfy the statutory requirements cannot rely on Section 2-513 for access to the financial books, although other contractual or legal rights may apply. A shareholder agreement can close that gap by giving every owner a contractual right to annual and periodic financial statements, tax returns, and reasonable access to records.

Oppression and judicial dissolution

Under Corporations and Associations Section 3-413, any stockholder entitled to vote in the election of directors may petition a court of equity to dissolve the corporation if the directors or those in control have acted or are acting in a manner that is illegal, oppressive, or fraudulent. The same section allows a petition when the stockholders have failed, for at least two consecutive annual meeting dates, to elect successors to directors whose terms have expired.

In Bontempo v. Lare, decided in 2015, the Supreme Court of Maryland (then the Court of Appeals) addressed how that statute works in practice. The Court applied the reasonable expectations test from Edenbaum v. Schwarcz-Osztreicherne, 165 Md. App. 233 (2005), under which oppression is measured against the minority stockholder’s reasonable expectations when the stockholder acquired the interest, while noting that disappointment alone is not oppression. The trial court had found that a minority stockholder was oppressed when he was fired for refusing to sell his shares. The Court held that, although dissolution is the only remedy the statute names, a court of equity may order remedies short of dissolution. It upheld a remedy that included an accounting of the majority owners’ personal use of company funds, with a proportionate distribution to the minority owner, rather than dissolving a thriving company.

What the agreement should add

• Information rights for every owner, regardless of percentage
• Reserved matters requiring minority approval, as described above
• A board seat or observer right
• Tag-along and preemptive rights
• A put right after a stated period or on defined events
• Limits on related-party transactions and owner compensation without approval
• A policy on tax distributions, so a minority owner is not taxed on income it never receives, which is especially important in an S corporation

For the LLC side of the same problem, which Maryland law treats differently, see our guides on minority LLC member rights and breach of fiduciary duty by a business partner.

Two owners with 50 percent each, or a board with an even number of directors, can reach a point where neither side can act. Maryland law provides a judicial exit. Under Section 3-413, stockholders entitled to cast at least 25 percent of the votes in the election of directors may petition for dissolution if the directors are so divided respecting the management of the corporation’s affairs that the votes required for board action cannot be obtained, or if the stockholders are so divided that the votes required to elect directors cannot be obtained. Dissolution of a profitable business is rarely what either owner wants, which is why the agreement should provide a contractual answer first.

Common deadlock mechanisms

• Escalation and mediation. A requirement that the owners meet, and then mediate, before taking any other action.
• A tie-breaking director or advisor. An independent person, named in advance or chosen by a stated method, who casts the deciding vote on defined issues.
• Buy-sell, or shotgun, provision. One owner names a price, and the other must either buy at that price or sell at that price. It is fast and self-policing, but it favors the owner with better access to cash.
• Put or call rights. A right for one owner to require a buyout at an appraised value after a deadlock lasts a stated period.
• Arbitration. A clause sending disputes among owners to private arbitration rather than court. It can be faster and confidential, but it limits appeal rights, and the clause should be drafted with the remedies the owners actually want in mind.

Our guide on 50/50 deadlock covers the LLC version of this problem, and our guide on business partner disputes covers the options once a dispute has already begun.

Maryland offers a special form of corporation for owners who want to run a corporation more like a partnership. Title 4 of the Corporations and Associations Article governs close corporations. Few small businesses use it, and many owners and advisors are unaware of it, but it can be a powerful tool in the right situation.

How a corporation becomes a close corporation

Under Section 4-201, a corporation elects close corporation status by including a statement that it is a close corporation in its charter, either in the original articles of incorporation or by a later amendment. If stock is already outstanding, the amendment requires the affirmative vote of every stockholder and every subscriber for stock.

What the close corporation statute allows

• A unanimous stockholders’ agreement. Under Section 4-401, the stockholders of a close corporation may enter into a unanimous stockholders’ agreement regulating almost any aspect of the corporation’s affairs or the relations of the stockholders, including management of the business, restrictions on transfer, the right to require dissolution, the exercise of voting power, terms of employment, the selection of directors and officers, and dividends or the division of profits. The agreement can be amended only by the unanimous written consent of the stockholders then party to it. A court of equity may enforce it by injunction or other relief, or, on a party’s motion, order dissolution.
• No board of directors. Under Section 4-301, a close corporation must have at least one director until a charter election to have no board takes effect. With that election, the stockholders can manage the business directly.
• Binding later owners. Under Section 4-401, a person who acquires stock after the unanimous stockholders’ agreement takes effect is treated as a party to it. If the stock was received by gift or bequest from a party, that is true whether or not the person knew of the agreement. Any other acquirer is bound if the person had actual knowledge of the agreement when acquiring the stock.

The statutory transfer restriction

Under Section 4-503, a transfer of stock in a close corporation is invalid unless every stockholder consents in writing within the 90 days before the transfer, or the transfer is made under a provision of a unanimous stockholders’ agreement that permits it, such as a transfer to the corporation, to a trust for the benefit of a stockholder’s family members as defined in the statute, or to a person named in the agreement. Transfers by operation of law to a personal representative, bankruptcy trustee, receiver, or guardian, and the creation of a security interest, are excluded, but a later sale by that representative, or a foreclosure sale, is subject to the restriction.

The tradeoff: statutory dissolution rights and potential buyouts

The close corporation statute gives each stockholder significant leverage. Under Section 4-602, any stockholder may petition for dissolution on the grounds in Section 3-413 or on the ground that internal dissension among the stockholders means the business can no longer be conducted to the advantage of the stockholders generally. Unless a unanimous stockholders’ agreement provides otherwise, a stockholder may also require dissolution if the stockholder requested consent to a bona fide transfer and did not receive it within 30 days, or if another party failed to buy the stockholder’s shares as required by the agreement and did not cure within 30 days. The petition must be filed within 60 days after the request or default.

Under Section 4-603, the other stockholders can avoid dissolution by electing to buy the petitioner’s shares at fair value. If they cannot agree on the price and the buyers post adequate security, the court sets fair value as of the day the petition was filed and may order payment in installments.

For most closely held corporations, an ordinary corporation with a carefully drafted shareholder agreement is the more flexible choice, and Section 4-401 itself confirms that it does not affect otherwise valid stockholder agreements in other corporations. The close corporation election makes sense for a small group of owners who want to manage the business directly and are comfortable with unanimity and the exit rights that come with it.

Many closely held Maryland corporations have elected to be taxed as S corporations, and many LLCs have elected S status as well. For a corporation, the shareholder agreement is one of the main tools for protecting that election, and a carelessly drafted agreement can put it at risk. Our guides on the S corporation election and S corporation reasonable compensation cover the tax background.

Eligible shareholders

Under Internal Revenue Code Section 1361(b)(1), an S corporation may not have more than 100 shareholders, may not have a shareholder other than an individual, an estate, or certain trusts and exempt organizations, may not have a nonresident alien shareholder, and may not have more than one class of stock. Under Section 1362(d)(2), the election terminates when the corporation ceases to meet those requirements. A single transfer of shares to a partnership, a corporation, a nonresident alien, or a trust that does not qualify can end the election.

The shareholder agreement should therefore:

• Prohibit, and declare void, any transfer to a person who is not an eligible S corporation shareholder
• Require advance notice and consent for transfers to trusts, and require any trust to make the necessary elections on time
• Require each owner to consent to and preserve the S election and to cooperate in seeking relief if an inadvertent termination occurs
• Allocate responsibility, and liability, if one owner’s action terminates the election

The IRS can grant relief for an inadvertent termination under Section 1362(f), but that process takes time and professional fees. Preventing the problem is far cheaper.

The one class of stock rule

An S corporation may have voting and nonvoting common stock. Section 1361(c)(4) provides that differences in voting rights among shares of common stock do not create a second class. But all shares must carry identical rights to distributions and liquidation proceeds, and under Treasury Regulation Section 1.1361-1(l)(2)(i), that question is decided based on the charter, articles of incorporation, bylaws, applicable state law, and binding agreements relating to distribution and liquidation proceeds. A shareholder agreement is a binding agreement. A provision that gives one owner a preferred return, a priority on liquidation, or disproportionate distributions can create a second class of stock and terminate the election.

Buyout prices

Buy-sell agreements, transfer restrictions, and redemption agreements are generally disregarded for the one class of stock analysis under Treasury Regulation Section 1.1361-1(l)(2)(iii)(A). They are taken into account only if a principal purpose of the agreement is to circumvent the one class of stock requirement and the agreement sets a purchase price that, when the agreement is entered into, is significantly above or below the fair market value of the stock. The regulation provides that an agreement to purchase or redeem stock at book value is not considered to establish such a price. Formula and appraisal provisions should be drafted with that safe harbor in mind and reviewed with the company’s tax advisor.

A shareholder agreement is most effective when the corporation follows its governance procedures and maintains accurate records. Maryland courts rarely disregard the corporate form, generally requiring fraud or a paramount equity before holding stockholders personally liable for corporate obligations. Failure to observe corporate formalities, standing alone, does not ordinarily justify piercing the corporate veil, but inadequate records and disregard of corporate separateness can complicate disputes involving ownership, authority, and corporate transactions. See our guide on piercing the corporate veil for how those claims work.

The basics Maryland law requires

• An annual stockholder meeting. Under Corporations and Associations Section 2-501, each corporation must hold an annual meeting of its stockholders to elect directors. The statute also provides that a failure to hold the annual meeting does not affect the corporation’s existence or invalidate otherwise valid corporate acts. Nevertheless, corporations should maintain proper meeting records or use valid written consents when permitted by law to document stockholder decisions and corporate governance.
• Stockholder action by written consent. Under Section 2-505, stockholders may act without a meeting if every stockholder entitled to vote on the matter consents in writing or by electronic transmission and the consent is filed with the records of stockholder meetings. Holders of common stock may act by less than unanimous consent only if the charter authorizes it, and notice must then be given to the other stockholders within 10 days. Most closely held corporations should use unanimous consents and should not assume less-than-unanimous action is available.
• Board action by written consent. Under Section 2-408(c), the board may act without a meeting if every director entitled to vote consents in writing or by electronic transmission and the consent is filed with the board’s minutes.
• Good standing. The corporation’s annual report must be filed with SDAT on time. See our guide on SDAT good standing and forfeiture.

Records that should be kept current

• The charter, all amendments, and the bylaws as currently in effect
• A stock ledger showing every issuance and transfer
• Signed copies of the shareholder agreement, every joinder by a new owner, and every spousal consent
• Minutes and written consents for every stockholder and board action
• Records of any valuation updates required by the agreement

These records are what a buyer, lender, court, or departing owner will ask for. An ongoing relationship with counsel is often the simplest way to keep them current. See our guide on outside general counsel for Maryland businesses.

• Waiting until there is a dispute. Once owners know which side of a buyout they will be on, agreement becomes much harder.
• Relying on the bylaws. Protections in the bylaws can often be amended by the majority they were meant to restrain.
• Using a form agreement. Forms rarely address the issues specific to the business, the owners’ roles, or Maryland law, and they often include provisions that conflict with the bylaws or the S election.
• A stale fixed price. A buyout price set at formation and never updated can be wildly wrong when a death or departure finally occurs.
• No funding plan. A mandatory buyout the company cannot afford leads to default and litigation.
• No legend or notice. Without a conspicuous legend or written notice under Commercial Law Section 8-204, transfer restrictions may not bind a buyer who did not know about them.
• New owners who never sign. Every new owner, including an employee who receives shares, should sign a joinder before the shares are issued.
• Ignoring spouses. A spousal consent at signing avoids a fight over shares in a later divorce.
• Overlooking S corporation rules. Disproportionate distributions or a transfer to an ineligible owner can terminate the election.
• Inconsistent documents. The charter, bylaws, and shareholder agreement should be reviewed together so that they do not contradict each other.

No. Maryland law does not require a corporation to have a shareholder agreement. Every corporation must have a charter, and bylaws govern its internal procedures, but neither document typically addresses what happens when an owner dies, divorces, leaves, or wants to sell. For any corporation with more than one owner, a shareholder agreement is strongly advisable, and it is best signed at formation or before a new owner receives shares.

Bylaws are the corporation’s internal operating rules: board size, officers, meetings, notice, quorum, and voting procedures. A shareholder agreement is a contract among the owners that governs their relationship with each other, including transfer restrictions, buyouts, valuation, voting arrangements, and dispute resolution. Under Corporations and Associations Section 2-109, the bylaws can generally be changed by the stockholders, or by the board if the charter or bylaws give it that power. A shareholder agreement can be changed only as the agreement itself provides, which is why protections for minority owners belong there.

Not exactly. A buy-sell agreement addresses when and how an owner’s shares will be bought, such as on death, disability, divorce, or departure, and at what price. A shareholder agreement usually includes buy-sell provisions, but it also covers transfer restrictions, voting, board seats, reserved matters, drag-along and tag-along rights, information rights, and deadlock. Some companies use one combined document, and others use a separate buy-sell agreement alongside a shareholder agreement.

Yes, within limits. A shareholder agreement can require consent for a transfer or give the corporation and the other owners a right of first refusal. To bind a buyer who does not know about the restriction, Commercial Law Section 8-204 requires the restriction to be noted conspicuously on the stock certificate or, for uncertificated shares, the registered owner to have been notified of it. In a Maryland close corporation, Section 4-503 independently makes most transfers invalid without unanimous written consent or a provision of a unanimous stockholders’ agreement permitting the transfer.

Any stockholder may inspect the bylaws, minutes of stockholder meetings, annual statements of affairs, and voting trust agreements under Corporations and Associations Section 2-512. Under Section 2-513, one or more stockholders whose combined qualifying holdings have met the 5 percent threshold for at least six months may also inspect the books of account and stock ledger, subject to statutory exceptions for certain non-common shares. A stockholder entitled to vote may petition for dissolution under Section 3-413 if those in control act illegally, oppressively, or fraudulently, and in Bontempo v. Lare the Court of Appeals held that courts may order remedies short of dissolution. These protections are real but often require litigation, so a shareholder agreement that provides information rights, approval rights, and an exit mechanism is far more practical.

A close corporation is a corporation that has elected, in its charter, to be governed by Title 4 of the Corporations and Associations Article. Its stockholders may enter into a unanimous stockholders’ agreement under Section 4-401 that regulates nearly every aspect of the business, and the corporation may elect to have no board of directors. In exchange, stock transfers are restricted by statute under Section 4-503, the unanimous agreement can be amended only unanimously, and each stockholder has statutory rights under Section 4-602 that can lead to dissolution, which the other stockholders can avoid by buying the petitioner’s shares at fair value under Section 4-603.

Yes. An S corporation may have only one class of stock, and under Treasury Regulation Section 1.1361-1(l)(2)(i), whether all shares have identical distribution and liquidation rights is determined in part by binding agreements, which include a shareholder agreement. Provisions giving some owners preferred returns or disproportionate distributions can create a second class of stock and terminate the election. Buyout provisions are generally disregarded unless a principal purpose is to circumvent the rule and the price is significantly above or below fair market value, and a book value price is treated as safe. The agreement should also prohibit transfers to ineligible shareholders.

It depends on the agreement. Common methods are a fixed price updated periodically, a formula based on earnings or book value, and an independent appraisal at the time of the triggering event. The agreement should state whether discounts for a minority interest or lack of marketability apply, because that choice can significantly change the price. If there is no agreement and a close corporation buyout occurs under Section 4-603, the court determines fair value as of the day the dissolution petition was filed.

Yes. The current owners can sign an agreement at any time. Because the agreement will affect each owner’s rights, every owner who will be bound should sign it, and the corporation’s charter and bylaws should be reviewed at the same time so that the documents do not conflict. Existing stock certificates should receive a legend, or uncertificated owners should be given written notice, so the transfer restrictions are effective under Commercial Law Section 8-204.

It is often advisable. A lawyer representing the corporation represents the corporation, not each individual owner, and the owners’ interests in a shareholder agreement can differ, particularly between majority and minority owners or between founders and investors. Many owners use the company’s counsel to prepare the agreement and have their own counsel review it. At a minimum, each owner should understand who the drafting lawyer represents and have the opportunity to obtain independent advice.