Business Law Newsletter
Why Shareholders’ Agreements are Important
At the time of incorporation of a company, the focus is often establishing and building the business. While it is never too late to put a shareholders’ agreement in place, it is wise for the shareholders to turn their minds to this from the outset. A well-drafted shareholders’ agreement will set out expectations for the management of the company and the relationship among the shareholders. It will also provide a mechanism to manage disagreements and changing circumstances that may arise as time passes.
There is no standard form of a shareholders’ agreement. Rather, it is a document that is tailored to meet the needs and desires of the shareholders of a particular company. However, most shareholders’ agreements will address the following matters:
- The right of a shareholder to hold a seat on the board of directors, the number of directors to be appointed at any given time, and the process by which directors will be appointed and removed
- The day to day management of the company
- The distribution of profits of the company, including payment of dividends and the repayment of shareholder loans
- Whether the consent of some or all of the shareholders is required before the company can take certain actions, including the issuance of new shares, obtaining financing, granting a security interest to a third party over the assets of the company, the disposition of assets of the company, amalgamation, and/or the winding up of the company
- The resolution of disputes among the shareholders, which will often require mediation or arbitration prior to litigation
- The process to be followed in the event that a shareholder wishes to sell his or her shares, which may include a right of first refusal and/or a mechanism to determine the value of such shares
- The process to be followed in the event of disability, insolvency, or death of a shareholder
- Non-competition covenants that restrict a shareholder from competing with the company’s business during the period in which he or she is a shareholder and, in most cases, for a period following the time a party ceases to be a shareholder
As a business grows, the structure of the company may change. A shareholders’ agreement can be amended at any time to reflect these changes with the consent of all of the parties to the existing shareholders’ agreement.
Regardless of the size of your business or the relationship amongst the shareholders at the outset, a shareholders’ agreement is an important document that should not be overlooked. It can create certainty around the rights and obligations of the shareholders and avoid potential disputes that could otherwise become costly to resolve.
If you would like more information regarding creating, or amending, a shareholders’ agreement for your company, please contact our Corporate Services Group.
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