Shareholder agreements

Shareholder agreements

Shareholders agreements are contracts entered into by the shareholders of a company to govern their relationship and protect their respective interests. These agreements typically address matters such as share ownership, voting rights, dividend distributions, and mechanisms for resolving disputes among shareholders. Shareholders agreements help ensure transparency, alignment of objectives, and effective decision-making within the company.

If you have a partner or several partners in your corporation, it is strongly recommended that you layer-in a shareholders agreement. A corporation that has multiple shareholders is inevitably going to need an agreement that outlines what happens when one of those shareholders wants to leave the corporation, sell his or her shares, or take on more business partners.  It also outlines what happens to one’s shares in the event of divorce, death or disability. At a basic level, a shareholders agreement sets out the rights, restrictions and obligations of each shareholder relative to one another, and sets out the rules of the game in the event of an exit or dispute.

The importance of a shareholders agreement cannot be understated; let us consider the following example for illustrative purposes:

You and your partner, Joe, are plumbers who work 30 hours a week for your own plumbing company. Your business has enjoyed much success, earning profits of roughly $400,000 a year. You and Joe each own shares that are worth approximately $200,000 (using a basic valuation method). Unfortunately, Joe gets divorced and is ordered under the Family Law Act to transfer  $350,000 to his ex-spouse Jill. To make matters worse, their marital home is encumbered by a heavy mortgage and Joe has little to no other assets. In order to satisfy the equalization claim, Joe is forced to transfer his shares to Jill. Now you are in business with Jill, who has no knowledge of plumbing and you must split 50% of the business’s profits with Jill even though she does not work for the business.

A shareholders agreement could have protected your greatest asset – your business – by easily creating a clause that states that the shares of your business cannot be transferred to an ex-spouse upon equalization.

Shareholder agreements cover a wide variety of topics including the following:

1. The management positions and responsibilities of the shareholders
2. The method for valuing the shares of the corporation
3. The method for adding or removing shareholders for misconduct, death or inability to function in the management of the business
4. The mechanism for the valuation and sale of the whole business of the corporation
5. The method for determining management salaries, bonuses and dividends
6. Non-competition and non-solicitation clauses to prevent a departing shareholder from taking a key part of the corporation’s business, thereby damaging the corporation and its remaining shareholders;
7. The buy-sell provision, also known as the “shotgun” clause, which permits a shareholder to force the exit of another on certain terms
8. Succession arrangements for spouses or the next generation upon death or disability of a shareholder
9. Life insurance for key management employees and shareholders
10. Provisions that speak to the special majority or unanimity required for certain types of corporate decisions, such as selling the whole enterprise of the corporation or commencing a new enterprise
11. Dispute resolutions, such as arbitration and choice of law provisions