Shareholders' & operating agreements — the internal constitution that decides who can approve a sale.

The Shareholders' Agreement looks administrative. It is not. During an acquisition, it is the document that decides whether the deal closes on the seller's intended terms or stalls on a minority owner's veto. Buyers read it first; they price it accordingly. A clear agreement with strong drag-along rights signals a deal that can close cleanly. An ambiguous or missing agreement signals a closing process that may require separate negotiation with every minority shareholder.

§ 01 · Entity type and document choiceFunctionally equivalent, terminologically distinct.

Corporations (C-Corp, S-Corp) use a Shareholders' Agreement that governs relationships between shareholders. LLCs use an Operating Agreement (also called a Members Agreement) governing relationships between members. Despite the terminology difference, both serve the same core purpose: establishing governance rules, ownership rights, and transfer restrictions. The substantive provisions are nearly identical.

§ 02 · Voting thresholdsWhat requires a majority, what requires more.

The agreement specifies what percentage of owners must approve major decisions. Routine decisions typically require simple majority (50% + 1). Major decisions — sale of the entire business, merger or acquisition, change in business purpose, sale of substantial assets, dissolution, significant debt financing, related-party transactions, admission of new partners, amendment to the agreement itself — typically require supermajority (66.67%) or unanimous consent.

The strategic implication for M&A is direct. An agreement requiring unanimous consent for sale makes acquisition harder; every minority owner has effective veto power. An agreement requiring only majority consent allows a coalition to push through a sale. Sellers contemplating sale should know which threshold applies before LOI signing — it shapes which minority shareholders need to be brought along and which can theoretically block.

§ 03 · Drag-Along and Tag-Along RightsThe provisions buyers care about most.

Drag-Along Rights. In a sale, majority owners can "drag" minority owners into the transaction on the same terms. Without drag-along, minority owners can hold out and refuse to sell, preventing the transaction from closing. Drag-along is the buyer's preferred provision — it guarantees they can acquire 100% ownership without negotiating with every minority shareholder individually.

Tag-Along Rights. Minority owners have the right to "tag along" on a sale initiated by majority owners, selling their shares on the same terms and conditions. Tag-along protects minority owners from being left behind in a partial sale that strips value from the business they remain in. It is the minority's preferred provision.

The M&A impact: an agreement with strong drag-along rights makes it easier for acquirers to achieve 100% ownership. An agreement without clear drag-along may require separate negotiation with minority shareholders — complicating closing, extending diligence, and creating leverage for the minority to extract premium terms.

§ 04 · The other four provisionsProfit allocation, management authority, restrictive covenants, deadlock.

Profit and Loss Allocation. Typically pro-rata to ownership stakes; sometimes non-pro-rata when capital and labor contributions differ. Some agencies allocate based on producer revenue sourced by each owner, creating variable profit-sharing that incentivizes production.

Management Authority. Manager-managed LLC (designated manager makes decisions), member-managed LLC (all members equal authority), or Corporation (Board makes major decisions, officers execute daily). Specifies whether partners can individually bind the firm to contracts/loans without other partners' approval — a critical risk control.

Restrictive Covenants. Many Shareholders'/Operating Agreements embed non-compete and non-solicitation clauses directly. Consistency across documents (Buy-Sell, Shareholders' Agreement, separate Restrictive Covenants agreement) is critical — contradictions become litigation.

Deadlock Resolution. For partnerships with even ownership (50/50, 33/33/33), agreements often include mechanisms to resolve deadlock — the Shotgun Clause (one partner offers a price; other chooses whether to sell or buy at that price), Russian Roulette (one partner sets the price; other chooses to buy or sell), or Forced Sale / Dissolution.

§ 05 · The CAUV as annual revalidationWhere governance meets valuation.

The Certificate of Agreed Value (CAUV) is the simple annual document that ties the governance framework to the buy-sell pricing mechanism. Post year-end, owners review financials, discuss valuation, agree on a number, sign the certificate. The CAUV converts valuation from a contested legal dispute into a calm business decision made during a planning meeting.

The strategic value is operational discipline. Most agencies intend to update valuations annually but rarely do. The last CAUV is often 5+ years old, rendering the buy-sell agreement effectively ineffective. An external valuation engine (like Milly Books') gives the CAUV discussion an objective anchor.

§ 06 · Integration with the buy-sellFive conflict points to resolve before sale.

The Shareholders'/Operating Agreement and Buy-Sell must be carefully integrated. Five typical conflict points: voting rights (one document requires unanimous consent, another allows majority); valuation (the agreements reference different methods); triggering events (disability defined differently); funding (life insurance obligations not addressed in the governance document); and restrictive covenants (different durations or scopes).

The best practice is explicit cross-reference. The Buy-Sell should state: "Valuation shall be determined per the Certificate of Agreed Value maintained pursuant to Section X of the Shareholders' Agreement." Without that anchoring language, buyers conducting diligence flag the inconsistency, and the seller spends weeks reconciling documents instead of negotiating terms.

◆