Shareholders Agreements: What is it and why do you need it?
A shareholder’s agreement, also called a stockholder’s agreement, is an agreed-upon arrangement among a corporation’s stockholders. This agreement dictates how the company is operated and outlines shareholders’, directors’, and management’s rights, powers and obligations. The shareholder’s agreement should ideally involve the participation of all of the shareholders.
A preliminary understanding of the different types of shares that can be issued in a corporation and how capital is raised through the issuance of shares should always inform those who are party to a shareholder’s agreement.
A shareholder’s agreement will list the shareholders names as well as the number and type of shares each shareholder owns at the time the shareholder’s agreement is signed. This provides a measure of clarity and confidence among the shareholders, making clear to other shareholders and creditors as to how many shares there are and who owns them.
A shareholder should be issued with a share certificate as proof of purchase of shares of a private corporation prior to entering into a shareholder’s agreement. Finally, the shareholder’s agreement ends when all shareholders agree to end it, as stipulated on a specific date in the agreement.
Types of Shareholder’s Agreements
Shareholder’s 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.
Shareholder’s 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.
Let’s look at the different types of shareholder’s agreements:
Unanimous Shareholders Agreement
A unanimous shareholder’s agreement is an agreement shared among all the shareholders, which restricts the powers of the directors to manage and operate the corporation. Depending on the incorporating jurisdiction of your corporation, the agreement is a contractual agreement enforced by the Canada Business Corporations Act or Business Corporations Act (Ontario), which allows shareholders to unanimously relieve directors of some or all of their managerial powers.
Unanimous shareholder agreements often function to help resolve and settle disagreements between shareholders by laying out the procedures that will govern in the event of a dispute.
Shareholder Agreements in Private Equity Transactions
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. There are two relationships that are governed by the private equity shareholder’s agreement: the relationship between the private equity and the founder/owners and the relationship between the shareholders and the directors of the company.
The private equity shareholders’ agreement will also stipulate the following:
- Control of the business strategy, particularly when the private equity investor will exit to maximize profit through the selling of shares
- Restrictions on directors’ rights to make decisions, as well as appoint and remove directors of the Board
- Control of the sale and transfers of shares so that their value is not diluted
- Control to borrow or issue dividends
- Protection of intellectual property and restrictions on competition if founders leave
- Disclosures (warranties) subsequent to the private investor’s due diligence that reveal any financial obligations to third parties
Minority Shareholder Agreements
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 any other issue requiring shareholder votes, a minority shareholder doesn’t have voting strength on his own. This type of shareholder relationship is typically established in a small business, where initial funding comes from a group of friends or family. In exchange for the investment, a business owner gives you a percentage of ownership through stock.
A shareholders agreement that protects minority rights should list specific issues you foresee occurring for the business. The agreement should also outline how shares will be distributed and whether there is a right of first refusal, piggyback rights, and pre-emptive rights added. The health and long-term financial success of a corporation are in the details and clauses of the shareholder’s agreement.
Shareholders’ agreements are important documents that should cover all the rights and obligations of the shareholders, officers, and directors of a corporation. Taken together, the shareholder agreement is a comprehensive document that covers a wide range of possible contingencies that ensure the health and viability of your corporation.
That is why it is crucial that you hire a qualified lawyer with experience in the preparation of shareholder’s agreement to help you determine what kind of agreement best serves your interest. Would like to discuss whether your business can benefit from a shareholder’s agreement? We’re Here To Help™. Call one of our business lawyers at Kalfa Law Firm.
You work hard for your money; we work hard for you to keep it™ .
F.A.Q’s:
-Shira Kalfa, BA, JD, Partner and Founder
Shira Kalfa is the founding partner of Kalfa Law Firm. Shira’s practice is focused in corporate-commercial and tax law including corporate reorganizations, corporate restructuring, mergers and acquisitions, commercial financing, secured lending and transactional law. Shira graduated from York University achieving the highest academic accolade of Summa Cum Laude in 2012. She graduated from Western Law in 2015, with a specialization in business law. Shira is licensed to practice by the Law Society of Ontario. She is also a member of the Ontario Bar Association, the Canadian Tax Foundation, Women’s Law Association of Ontario, and the Toronto Jewish Law Society.
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