Frequently I advise clients who have or are forming an incorporated business with two or more shareholders to enter into a shareholders’ agreement.
An effective shareholders’ agreement clearly sets out the rights and obligations amongst shareholders and establishes mechanisms to deal with – or avoid – disputes that may arise in the future.
An effective shareholders’ agreement would include provisions dealing with such matters as:
- who will manage the day-to-day affairs of the corporation;
- what corporate decisions require super-majority or unanimous consent of the shareholders;
- how profits will be distributed;
- what protections will be afforded to minority or founder shareholders, if any;
- whether (and under what circumstances) shareholders will be required to inject cash into the corporation to finance investment opportunities or operating activities;
- whether shareholders will be jointly and severally liable for any personal guarantee given by any of them in order to secure corporate obligations (e.g., security given to a bank for a corporate loan);
- whether there will be restrictions on the ability of shareholders to transfer existing shares or restrictions on issuing new shares;
- whether (and under what circumstances) the shareholders will have an option to buy out other shareholders;
- what happens in the event a shareholder withdraws from the corporation, either voluntarily or in the event of death, disability, divorce or other ‘life events’;
- whether the shareholders will be subject to restrictive covenants (a topic discussed in a past blog here); and
- whether shareholder disputes which cannot be resolved amicably will proceed to Court or to binding arbitration or non-binding mediation (a topic for a future blog!).
This list is by no means exhaustive. But it should get you thinking.
As with any business relationship, it is critical that a shareholders’ agreement be put in place as early into the relationship as possible, before shareholder disputes arise or circumstances change. Although there are many precedents available, there is no such thing as a “one-size fits all” shareholders’ agreement. Rather, an effective shareholders’ agreement requires an examination of the parties’ unique circumstances in order to determine the content of the agreement in each case.