Business Lawyer Advice on Shareholder Agreement: A Tool for Avoiding Disputes

The Shareholder Agreement: A Tool for Avoiding Disputes

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What is a Shareholder Agreement?

A Shareholder Agreement is a written agreement that specifies the rules and procedures that shareholders must follow and the entitlements of shareholders in a corporation. While some aspects of corporate affairs are dictated by legislation, such as the Ontario Business Corporations Act, shareholders have the freedom to decide how other aspects of a corporation will be governed. A Shareholder Agreement can be designed to meet the specific needs of a corporation and its shareholders.

Establishing an Agreement Early

It is easiest to establish a Shareholder Agreement at the very beginning of a new corporate business, before shares are issued and money is invested. Even if the corporation is small or all of the shareholders are in agreement at the time, it is still a good idea to establish this as early as possible in order to minimize risks and protect each shareholder’s rights. As the business grows or as time passes, shareholders may run into disputes, encounter strained relationships or have trouble reaching a consensus. If an agreement has already been made, it can help to minimize and resolve disputes when they arise.

Key Elements of an Agreement

There are a lot of elements that can be included in a Shareholder Agreement in order to create a unique agreement that meets the needs of the shareholders.

Here are some key elements to consider including in an Agreement:

  1. Defining Each Shareholder’s Role

The Agreement should clearly define each shareholder’s role, compensation and how the corporation will be managed. While all shareholders may want the best for the corporation, there may be a clash in management styles amongst the various shareholders.

  1. Protection for Minority Shareholders

With unequal voting power, the voices of minority shareholders can often be overlooked during major corporate decisions. Provisions can be included in the agreement to award specific powers to specific shareholders, clarify voting procedures or to establish fair valuation methods for selling shares.

  1. Restricting Share Transfers

Shareholders may have an interest in restricting to whom shares can be sold or transferred. Provisions such as the right of first refusal or options to purchase can ensure that when a shareholder is looking to sell their shares, they must first offer to sell them to the remaining shareholders before selling to an outside buyer. It is also important to include provisions for what will happen during certain life events such as the death or bankruptcy of one of the shareholders. The Agreement can require the shareholders to sell the shares back to the corporation, as opposed to transferring them to the heirs or creditors.

  1. Unanimous Shareholder Agreements

A Shareholder Agreement can restrict powers that are allotted to the directors of the corporation. Tasks such as entering into major contracts, appointing officers or issuing shares can instead be assumed by the shareholders together. If this occurs then a Unanimous Shareholder Agreement (“USA”) forms, requiring a unanimous vote on these specific responsibilities. Although shareholders are typically not held liable for corporate debts and decisions, if there is a USA in place the shareholders can be held liable for decisions relating to these tasks.

  1. Managing Disputes

Even with a Shareholder Agreement in place, disputes can develop for many reasons, such as a lack of communication, different visions for the corporation or if one shareholder is not pulling their weight. The Agreement can mandate that certain disputes go through mediation or arbitration before any legal proceedings are commenced. Mediation or arbitration can lead to quick, cost-effective and meaningful resolutions.

Something to Think About

A thorough and clearly written Shareholder Agreement can minimize the number of disputes amongst shareholders and can help to effectively deal with disputes when they do arise. A Shareholder Agreement should also contain some flexibility so that it can address unforeseen issues. It is a smart decision to invest the time and resources to establish a Shareholder Agreement at the inception of a new corporation.

Please contact Michael Paiva for more information about Shareholder Agreements, or if you require assistance with a possible shareholder dispute or corporate law matter.