What Is a Shareholders Agreement?
A shareholders agreement is a legal contract entered into by the shareholders of a corporation to govern their relationship and protect their respective interests. These agreements clearly outline:
- Share ownership and rights
- Voting rights and decision-making
- Dividend distributions
- Mechanisms for resolving disputes
By setting clear rules, a shareholders agreement ensures transparency, alignment of objectives, and effective decision-making within your corporation.
Why a Shareholders Agreement Is Important
If your corporation has more than one shareholder, a shareholders agreement is essential. It sets out what happens when:
- A shareholder wants to leave the business
- Shares are sold or transferred
- A shareholder experiences death, disability, or divorce
Without an agreement, your business could face serious financial and operational risks.
Example:
You and your partner Joe run a plumbing business earning $400,000/year, with each of you holding shares valued at $200,000. If Joe divorces and is required under the Family Law Act to transfer $350,000 to his ex-spouse, Jill, she could acquire his shares. Without a shareholders agreement, you might be forced to split profits with someone who has no knowledge of or involvement in the business.
A properly drafted shareholders agreement could prevent this scenario by including clauses that restrict share transfers to ex-spouses, protecting your business and your investment.
Key Provisions in a Shareholders Agreement
Shareholders agreements can cover a wide variety of topics, including:
- Management positions and responsibilities of each shareholder
- Valuation of shares and methods for buying or selling them
- Adding or removing shareholders due to misconduct, death, or incapacity
- Valuation and sale of the corporation
- Determining management salaries, bonuses, and dividends
- Non-competition and non-solicitation clauses to protect business operations
- Buy-sell or “shotgun” clauses allowing shareholders to force the exit of others under specific terms
- Succession planning for spouses or the next generation
- Life insurance for key shareholders
- Special majority or unanimity rules for major corporate decisions, such as selling the company
- Dispute resolution mechanisms, including arbitration and choice of law
These clauses help protect both the business and its shareholders, prevent disputes, and ensure smooth operations.
Why Consult a Lawyer?
A shareholders agreement is tailored to your unique situation. Each corporation has different shareholders, business goals, and risks. The above information is general guidance and does not constitute legal advice.
For specific advice and drafting, consult a corporate lawyer at Kalfa Law Firm to ensure your shareholders agreement:
- Protects your business interests
- Aligns with Ontario corporate law
- Addresses potential disputes, exits, or succession scenarios
Related Services at Kalfa Law Firm
- Incorporation & Corporate Structuring
- Business Purchase and Sale Agreements
- Professional Corporations (PCs)
Ontario Legal Framework
Shareholders agreements in Ontario operate within the legislative structure of the Ontario Business Corporations Act (OBCA).
