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Anyone know what happens to a two-party shareholder agreement when a third shareholder enters the picture (by a shareholder transfer diluting the original 2 shareholders)? That shareholder agreement is silent on what happens. Now that there are 3 shareholders is it void?

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Sounds like a giant malpractice cluster - hopefully you weren’t involved in the original governance documents or transfer of interest to the third SH.

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Would this scenario even be addressed in a shareholder agreement? Is this a corporation that had only 2 shareholders and now has 3? If so, how did the new shareholder get the shares? You say it was a transfer of shares but it had a dilutive effect; a transfer of shares from a current shareholder to a new shareholder shouldn't have a dilutive effect, it's merely a transfer of equity from one party to another (unless you're saying both shareholders transferred an equal amount of shares to new shareholder). A third party receiving shares that dilute the original two shareholders implies to me that the new third shareholder was issued shares directly by the corporation. If that's the case, then the shareholder agreement likely doesn't cover it unless the corporation itself is bound by the shareholder agreement somehow. You would have to look at the corporation's by-laws, articles of incorporation, and agreements it has with its shareholders.

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Ideally at the time of the transfer, the new shareholder should have signed a joinder agreement or the share transfer agreement should have included a section where the third shareholder would agree to be bound by the shareholder agreement (attached to the SPA). If that wasn't done, I feel the best way to do this is to prepare an amended and restated shareholder agreement and have a unanimous shareholder consent signed approving the new shareholder agreement.

likesmart

What does the agreement say about it? If it's silent, then it's probably still effective unless the state of incorporation or the state governing the agreement has laws that cover it.

Maybe you can try to avoid the agreement under some frustration of purpose or other argument that the presence of a 3rd shareholder somehow means the agreement shouldn't be enforced. But in that case it would very much matter how the new shareholder got involved; can't come trying to avoid an agreement on the premise that there are new circumstances you caused.

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Yeah, there's something going on here that smells a lot like incompetent drafting. This should absolutely be covered in a shareholder agreement or corporate governance docs

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Are the shares all the same class? Bc if so, generally the rights and preferences would inure to all shares of the same class. Again this all presupposes some level of sophistication at issuance to SH 1 and SH 2 and decent state corporate law, like DGCL.

smart

If both the M&A terms were silent as to adherence, what the corporation’s articles set as defaults? If nothing, anything in the jurisdiction’s corporations act or statutes for default rights and terms of a shareholder? Unless the shareholder agreement included a deed of adherence, you’re probably looking at filler provisions for treating the new minority shareholder, though I figure generally without the adherence language the shareholder agreement should only apply to the original two, not the new party, since it sounds to me like the agreement is an agreement between the original shareholders regarding their own shares, and not a governing document for all shareholders under the corporation.

smart

It had 2 (50-50) now had 3 (45-45-10). For hypothetical purposes, they way the new shareholder got the shares is irrelevant. And nothing in the corporate formation docs says anything on this.

Sounds like there's a new 10% shareholder who's not subject to the existing SH agreement, which is likely still effective as to the orginal 2 SHs.

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