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The Key to Drafting an Enforceable Shareholder or Member Settlement or Agreement

Clark Law Firm PC March 23, 2023

Multi Ethnic Business People Having Business MeetingWhen shareholders or members of a business are in a dispute, it can be difficult to come to a resolution. In these situations, shareholders and members are often tasked with drafting a settlement to resolve their disputes. 

Drafting an effective shareholder or member settlement requires knowledge of corporate law, negotiation skills, and experience in resolving complex disputes. This is not something you should do on your own. Instead, contact a skilled business attorney at Clark Law Firm PC to assist you with your particular dispute.  

John can provide valuable assistance in drafting your document so that it covers all essential elements while meeting all applicable legal requirements. With an office in Birmingham, Alabama, John helps clients resolve their shareholder and other business-related disputes throughout Alabama and the Florida Panhandle.  

What Is a Shareholder or Member Settlement? 

A shareholder or member settlement is an agreement between shareholders/members of a company to resolve any disputes they may have regarding their rights in the company, describe the future means of managing the company, or limiting/expanding other shareholder/member rights. This document typically outlines the terms of the agreement such as how ownership will be divided, how assets and liabilities should be handled, and other key details related to the dispute. It also typically includes provisions for enforcing the settlement if either party breaches its terms. When properly drafted, this document serves as a binding contract that all parties must abide by once signed. 

Important Provisions of an Enforceable Shareholder/Member Settlement or Agreement

For a shareholder or member settlement to be useful to the parties, certain provisions should be included. These provisions will help protect both parties and make sure that the settlement resolves the disputes going forward: 

  1. Covenant not to sue. Once a settlement is reached, both parties should agree not to sue each other for any past breach of contract or violation. This provision should be explicit to avoid later confusion. The only right to sue another party should be based on that party's future violation of the shareholder/member agreement or settlement agreement.  

  1. Knowledge and judgment. The agreement should state that all parties involved in making decisions related to the dispute are using their own personal judgment when deciding how to move forward with the settlement agreement.  

  1. Fairness and good faith. All decisions related to the dispute should be made in good faith and with fairness for all involved parties in mind.  

  1. Representations. The agreement should provide that all representations made by either party are accurate and truthful so there are no misunderstandings or misinterpretations later.  

  1. Warranties. All warranties must be clearly outlined so both parties understand exactly what kind of protection each has if something goes wrong later. 

  1. The wording of the release. The language used in an enforceable agreement should be simple yet precise. The more specific you can make your language, the better protected your interests will be throughout its duration.  

This is not an exhaustive list of provisions that should be included in a shareholder or member settlement or agreement.  

Potential Pitfalls When Drafting a Shareholder or Member Settlement or Agreement

Some of the common pitfalls when drafting a shareholder or member settlement or agreement include but are not limited to: 

  • Not having a shareholder or member agreement . The first pitfall is not having any agreement. Without such an agreement, there may be no clear guidelines for handling disputes between the parties.   

  • Using an online template to create a shareholder agreement or settlement. While online templates may seem like an easy way to get your settlement agreement drafted quickly, they often do not provide adequate protection for all parties involved in the dispute.  

  • Not putting your agreement in writing. A third issue is not putting your shareholder or member settlement or agreement in writing. Verbal agreements do not provide enough protection because memories fade or change or facts are forgotten over time. It is always best practice to put everything into writing as soon as possible after reaching an agreement between the parties involved.  

  • Not consulting with a lawyer before signing the document. Even if you are confident that you have drafted a fair and balanced document, it is still important that you seek legal advice prior to signing it so that any risks associated with it can be identified and addressed beforehand in order to protect yourself from future liability issues down the road. 

Drafting an effective shareholder or member settlement or agreement requires careful consideration of several key elements so that you can avoid any potential pitfalls and issues.  

Practical & Diligent Legal Guidance 

When drafting an enforceable shareholder or member settlement or agreement, or understanding your rights pertaining to shareholder or member disputes as a whole, it is important to seek legal counsel. John can provide you with practical and diligent legal guidance to ensure that all applicable laws are followed and your rights are adequately protected when drafting a shareholder or member settlement or agreement. Reach out to Clark Law Firm PC today to set up a case review.