Business FAQ 5

Shareholders agreements have a host of provisions focused on (a) who makes decisions relating to the management and operations of the company, and (b) how shares can be transferred, distributed, and sold. Shareholders’ agreements will also set out the rights, roles duties and responsibilities of the directors and officers, create options to buy or sell shares, determine what will happen in the case of death or retirement of a shareholder, establish the number of directors on the board and their duties, and provide existing shareholders with the right to approve future shareholders.

While directors of the corporation generally are invested with the power to resolve disputes, a “unanimous shareholders agreement” is one that is shared among all the shareholders, which will restrict the powers of the directors to manage and operate the corporation and will stipulate the procedures for how shareholders will settle disagreements.

Private equity investors are high net worth individuals who invest in private equity corporations in exchange for shares. The company, thereby, is able to raise additional capital, while the private equity investor hopes to make a financial return. Because of their financial clout, private equity investor hold substantial powers relating to the operation of the corporation, including when the private equity investor will exit to maximize profit through the selling of shares; rights to appoint and remove directors of the Board; control of the sale and transfers of shares; control to borrow or issue dividends; protection of intellectual property and restrictions on competition if founders leave; and disclosures (warranties) that reveal any financial obligations to third parties.

A minority shareholder owns less than half of a company. As a result, if a dispute arises over the sale or distribution of assets, or another issue requiring shareholder votes, a minority shareholder doesn’t have voting strength on his own. That being said, a minority shareholder can still ensure certain rights by the inclusion of provisions related to how shares will be distributed and various clauses, such as the right of first refusal, piggy back rights, and pre-emptive rights. See our answer below for more details about these important shareholder clauses.

Right of First Refusal allows shareholders to buy the shares another shareholder would like to sell first before the shares are sold to outside third parties. This allows shareholders to retain their percentage and protects them from unwelcome shareholders.

Similar to a Right of First Refusal, pre-emptive rights protect the rights of shareholders in cases where the corporation decides to sell newly issued shares from treasury to a third party. This will allow shareholders to buy shares before they are sold to third parties and consequently retain their percentage share in the corporation.

Piggyback rights, also known as “tag-along” rights protects minority shareholders in the event of a third party buyout of a majority shareholder’s shares.  This allows the minority shareholders to sell their shares at the same price and terms if they so choose, effectively piggybacking on the transaction. This protects minority shareholders from being in business with an unwanted new co-owner and from being forced to accept less attractive offers.

A drag-along right is the mirror opposite of a piggy-back right; it is a provision that enables a majority shareholder to force a minority shareholder to join in the sale of a company. The majority owner doing the dragging must give the minority shareholder the same price, terms, and conditions as any other seller. Drag-along rights are designed to protect the majority shareholder.

A valuation clause sets out a method for determining the value of shares. This clause will set out how the value of the shares will be determined, which will become necessary when shareholders want to sell their shares or when a shareholder dies and the other shareholders want to buy those shares. A valuation clause is key and is primarily intended to avoid disputes at such time as when a shareholder wishes to exit from the business, on retirement or for other reasons.

A non-compete clause refers to situations where one party to the contract agrees to not enter into or start a similar profession or offer the same or similar services in competition against the other party, usually the employer, for a prescribed period of time. For a non-comp provision to be enforceable under Canadian law, it must be sufficiently limited in temporal (time) and geographical scope (space).

A non-solicitation clause prevents shareholders or former shareholders from inducing other shareholders, directors, officers or employees of the corporation to leave the corporation or to compete against it. This clause prevents an influential shareholder from poaching other employees. In contrast to the non-compete clause, the non-solicitation clause does not contain a geographic area or apply to only particular types of products or services.

A "shotgun" clause is a method which enables a party to exit a corporation. It permits one shareholder, at any point in time, to offer his shares to the other shareholder(s) at certain price terms. The other shareholders can either agree to sell their shares at that price, or they can buy the offering shareholders shares at that same price. The benefit of the shotgun clause is that it forces a fair and reasonable valuation of shares between the parties when one of the parties wishes to exit the corporation. The shotgun clause is risky as the offering shareholder may “kill” himself in the process; that is, he may be forced out of the corporation if the other shareholders decide to buy himself out in turn.

Yes, they can if the shareholders’ agreement provides provision for this. Since capital expenditures lock up large sums of money, minority shareholders may require that they approve any significant expenditure of capital to protect their investment in the business.

: Shareholders agreements have a host of provisions focused on (a) who makes decisions relating to the management and operations of the company, and (b) how shares can be transferred, distributed, and sold. Shareholders’ agreements will also set out the rights, roles duties and responsibilities of the directors and officers, create options to buy or sell shares, determine what will happen in the case of death or retirement of a shareholder, establish the number of directors on the board and their duties, and provide existing shareholders with the right to approve future shareholders.

While directors of the corporation generally are invested with the power to resolve disputes, a “unanimous shareholders agreement” is one that is shared among all the shareholders, which will restrict the powers of the directors to manage and operate the corporation and will stipulate the procedures for how shareholders will settle disagreements.

Private equity investors are high net worth individuals who invest in private equity corporations in exchange for shares. The company, thereby, is able to raise additional capital, while the private equity investor hopes to make a financial return. Because of their financial clout, private equity investor hold substantial powers relating to the operation of the corporation, including when the private equity investor will exit to maximize profit through the selling of shares; rights to appoint and remove directors of the Board; control of the sale and transfers of shares; control to borrow or issue dividends; protection of intellectual property and restrictions on competition if founders leave; and disclosures (warranties) that reveal any financial obligations to third parties.

A minority shareholder owns less than half of a company. As a result, if a dispute arises over the sale or distribution of assets, or another issue requiring shareholder votes, a minority shareholder doesn’t have voting strength on his own. That being said, a minority shareholder can still ensure certain rights by the inclusion of provisions related to how shares will be distributed and various clauses, such as the right of first refusal, piggy back rights, and pre-emptive rights. See our answer below for more details about these important shareholder clauses.

Directors can be elected in several ways: the majority shareholder can elect the directors or each shareholder can elect a representative director. Alternatively, the shareholders may agree to elect a list of specified directors. All Directors have a duty to act in the best interest of the corporation no matter how they were elected and which group of shareholders they represent.