The Law Offices of Paul H. Appel – Your Trusted Business Law Partner in New Jersey
Contracts · Closely Held Corporations
Bylaws run the corporation; a shareholder agreement governs the owners. Paul H. Appel drafts buy-sell and shareholder agreements that decide in advance who can own shares, when an owner can be bought out, and at what price.
The gap bylaws leave
A New Jersey corporation formed under the Business Corporation Act (N.J.S.A. Title 14A) can operate with only a certificate of incorporation and bylaws. Those documents cover meetings, officers and voting mechanics. They usually say nothing about what happens when a co-owner dies, divorces, retires, stops working in the business, or wants to sell shares to an outsider.
In a company with two to five shareholders, those events are not hypothetical. Without a shareholder agreement, a deceased owner's shares can pass to an estate with no interest in the business, a departing founder can keep a third of the equity indefinitely, and a disagreement between equal owners can stall every decision. New Jersey does provide a statutory remedy for oppressed minority shareholders in closely held corporations (N.J.S.A. 14A:12-7), but relying on a court to sort out an ownership breakdown is slow, expensive and unpredictable.
A well-built agreement replaces that uncertainty with rules everyone accepted while relations were good. For companies organized as LLCs, the same issues belong in the operating agreement instead.
Core provisions
Transfer limits
Restrictions on selling or pledging shares, a right of first refusal for the company or other owners, and permitted transfers such as to a family trust. For S corporations, these clauses also help prevent a transfer to an ineligible shareholder that could jeopardize the election.
Buyout triggers
Death, disability, termination of employment, retirement, bankruptcy and divorce are the usual triggers. The agreement says whether each one obliges the company or the other owners to buy, or merely gives them the option to buy.
Price and payment
A fixed price updated annually, a formula, or an independent appraisal — plus payment terms such as a down payment and promissory note, and whether insurance funds the purchase.
Control
Supermajority votes on major decisions, tie-breaking mechanisms, mediation steps, and in some cases a buy-sell "shotgun" clause that forces one owner to buy or sell.
Valuation choices
The pricing clause is the provision most often litigated, so the choice deserves time and input from your accountant.
| Method | Strength | Weakness |
|---|---|---|
| Agreed value, updated yearly | Simple and inexpensive | Owners frequently forget to update it, leaving a stale number |
| Formula (e.g. multiple of earnings) | Predictable and self-executing | Can drift far from true value as the business changes |
| Independent appraisal | Reflects value at the time of the event | Costs more and takes longer; the appraisal standard must be defined |
| Hybrid with floor or cap | Balances certainty and fairness | More drafting, and the interaction must be tested with examples |
Whatever method is chosen, the agreement should state whether minority or marketability discounts apply. See business valuation guidance for how valuation clauses are built.
How the work proceeds
The process mirrors the firm's wider contract drafting and review work, with extra care because co-owners do not always want the same thing.
Paul learns each owner's goals and concerns. Where owners' interests diverge, the firm makes clear whom it represents and whether others should have their own counsel.
Owners agree the business points — triggers, pricing, payment, control — in plain language before any drafting.
The draft is walked through realistic scenarios, such as an owner's death or a sudden resignation, to confirm the outcome is what everyone expects.
Share certificates or ledger entries receive transfer-restriction legends, and bylaws are amended where they conflict.
Keep it current
When the relationship has already broken down, the issue becomes one of shareholder dispute resolution rather than drafting.
Questions & answers
Not legally, but most closely held companies benefit from one. Bylaws handle internal governance such as meetings and officer roles. They rarely restrict who may acquire shares or require a buyout when an owner leaves or dies. Those owner-to-owner promises are the job of a shareholder agreement, and they are much easier to agree before anyone has a reason to disagree.
Common triggers are death, long-term disability, termination of employment, voluntary departure, personal bankruptcy and transfer of shares in a divorce. Each trigger can be mandatory or optional, and the price or payment terms can differ — for example, a discount for an owner who leaves to compete. The right list depends on whether owners also work in the business.
There is no single correct method. Small companies often use an agreed value updated annually, a formula tied to earnings, or an appraisal at the time of the event. Each has trade-offs between simplicity and accuracy. The clause should also address discounts, the valuation date and payment terms, ideally with your accountant's input.
Yes, by following the amendment clause, which usually requires the written consent of all parties or a stated supermajority. Amendments are common after ownership changes, new financing or a shift in the business. Changes should be documented formally and signed by every party bound by the original agreement.
Your attorney
Every matter at the firm is handled personally by Paul — the same attorney reads the documents, gives the advice and negotiates on your behalf.
Contact
Describe what the business is dealing with — a contract on your desk, a deal in progress, a dispute or a company you are about to form. You will hear back from the attorney who handles the work.
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