Maryland Shareholder and Partnership Agreements: How They Protect Business Owners

Why These Agreements Matter in Maryland

Shareholder agreements (for corporations) and partnership or operating agreements (for partnerships and LLCs) set the rules for ownership, control, and exit events. When these documents are missing or incomplete, Maryland’s default statutes often fill the gaps and can lead to outcomes owners did not intend. See the Maryland General Corporation Law, the Maryland Revised Uniform Partnership Act, and the Maryland Limited Liability Company Act.

A tailored contract lets you: align voting power with investment, restrict unwanted transfers, resolve deadlocks, plan for buyouts on death or departure, and protect confidential information and client relationships.

Core Protections to Include

• Ownership and capital: classes of equity, capital contributions, profit/loss allocations, vesting, and dilution protections.
• Governance and voting: board/manager composition, supermajority items, information rights, and meeting procedures.
• Transfer restrictions: rights of first refusal, co-sale/tag-along and drag-along provisions, and permitted transfers to family trusts or affiliates.
• Buy-sell mechanics: trigger events (death, disability, termination, deadlock, divorce, bankruptcy), valuation method, payment terms, and funding (insurance or notes).
• Employment and restrictive covenants: confidentiality, invention assignment, and narrowly tailored non-solicitation provisions consistent with Maryland law.
• Dispute resolution: internal escalation, mediation or arbitration, venue, and governing law (Maryland).
• Records and tax matters: delivery of financials, tax distributions, and designation of tax representatives.

How Maryland Law Interacts With Your Agreement

Your agreement works alongside Maryland statutes. For corporations, the MGCL allows many internal affairs to be set by charter and bylaws (e.g., voting and share rights). See charter provisions and bylaws. Partnerships are largely governed by the partnership agreement, but certain duties cannot be waived under the Maryland Revised Uniform Partnership Act § 9A-103 (e.g., the duty of loyalty and duty of care). Corporate directors owe statutory duties under MGCL § 2-405.1, and while the charter may limit certain monetary liability, it cannot do so for bad faith or similar misconduct (MGCL § 2-405.2). For LLCs, an operating agreement may regulate the company’s internal affairs and member relations (see LLC Act § 4A-402), with statutory provisions applying where the agreement is silent.

Bottom line: many defaults are contractually flexible, but some statutory procedures and fiduciary obligations cannot be waived (and, where modifiable, may only be limited within statutory bounds). Clear drafting ensures your negotiated terms supersede default rules where permitted.

Choosing the Right Valuation Approach

Disputes often center on price. Common approaches include: fixed-price schedules updated periodically; formulas tied to EBITDA or revenue; appraised fair value by a neutral valuation expert; or a multi-appraiser mechanism. Specify any discounts (or their exclusion), the effective date, adjustments for debt/cash, and who bears costs.

Deadlock Prevention and Breakers

Closely held companies can stall when owners split. Consider tie-breaker independent directors, alternating decision rights, put/call options, shotgun clauses with safeguards, or mediation/arbitration triggers for defined categories. Define what constitutes a deadlock and the timeframe before a remedy activates.

Funding Buyouts

Plan how the company or remaining owners will pay: key-person life or disability insurance, sinking funds, promissory notes with clear interest, amortization, and security, or third-party financing. Align funding with valuation to avoid liquidity crises.

Restrictive Covenants Under Maryland Law

Maryland courts generally enforce restrictive covenants that are narrowly tailored to protect legitimate business interests—such as customer goodwill and trade secrets—and are reasonable in scope and duration. Overbroad non-compete terms face closer scrutiny. See, e.g., Becker v. Bailey (Md. 1973) and Fowler v. Printers II, Inc. (Md. Ct. Spec. App. 1991). In addition, Maryland law bars noncompete agreements for many lower-wage employees (Lab. & Emp. § 3-716), so tailor any restrictions to role, geography, and duration, and pair them with adequate consideration.

For LLCs: Operating Agreement Essentials

If you formed an LLC for flexibility, your operating agreement should cover manager vs. member management, consent thresholds, distributions and tax allocations, capital calls, transfer rights, and dissociation events. Address admission of new members and drag/tag mechanics to facilitate exits. Where your agreement is silent, the Maryland LLC Act will supply default rules.

When to Update Your Agreement

Revisit your documents after ownership changes, significant financing, adding or removing managers or key employees, expansion into new markets, or material changes in tax or employment law. Periodic legal review helps ensure your agreement continues to reflect the owners’ intent and current Maryland law.

Tips for Maryland Owners

Checklist: Quick Agreement Audit

FAQ

Do we need both bylaws and a shareholder agreement?

Bylaws handle corporate procedures; a shareholder agreement can add binding owner-level rights like transfer restrictions and buy-sell terms. Many companies use both.

Can we waive fiduciary duties in Maryland?

Not entirely. Certain duties and liability limits are constrained by statute. Tailoring is possible within statutory bounds; get Maryland-specific counsel.

What happens if we never set a valuation method?

You risk disputes and litigation costs. Establish a clear formula or appraisal process with timelines and funding terms.

Are non-competes enforceable?

Only if reasonable and tied to legitimate interests, and they are barred for many lower-wage employees. Narrow non-solicitation often works better.

Practical Next Steps

• Take inventory of your current bylaws, shareholder, partnership, or operating agreements.
• Identify gaps: buy-sell triggers, valuation, transfer restrictions, decision rights, and dispute processes.
• Align the agreement with your cap table and employment documents.
• Coordinate with your CPA on tax allocations and distributions.
• Work with Maryland counsel to draft or update agreements tailored to your ownership structure and industry.

Ready to protect your ownership and reduce risk? Talk with our Maryland business attorneys about drafting or updating your agreement.