Shareholder Agreements

WHY YOU SHOULD HAVE A SHAREHOLDER AGREEMENT

While there is no statutory requirement to have a shareholder agreement in the province of Ontario, in our experience, a well-drafted shareholder agreement is a cost-effective way to mitigate the risk of future conflict among shareholders. Without a shareholder agreement, the relationship between shareholders has not been clearly defined. A shareholder agreement will clarify among other things, the shareholdings of the shareholders, procedures for making decisions, restrictions on the transfer of shares if any, and exit strategies for shareholders wishing to leave the corporation. While shareholder agreements have an initial cost that must be justified by the shareholders and the company, they have the potential to save the company thousands of dollars during its lifetime. One of the common reasons businesses fail is disputes among the shareholders that end up disrupting the business of the corporation. Below is a list of benefits that we find shareholder agreements bring to a corporation:

• Mitigate the risk of costly litigation among shareholders by setting out procedures for alternative dispute resolution including exit strategies for disgruntled shareholders.
• Shareholder agreements may prevent strangers or entities from acquiring shares in the corporation and having voting power.
• Shareholder agreements may protect shareholder rights through the inclusion of pre-emptive rights, piggyback clauses, tag-along rights, and drag-along clauses.
• Shareholder agreements may protect the corporation by including non-compete, non-solicitation, and confidentiality clauses.
• Shareholder agreements may protect the corporation by setting out procedures to be followed upon the death, disability, or divorce of a shareholder.

COMMON TERMS OF A SHAREHOLDER AGREEMENT

A well-drafted shareholder agreement will include contingencies for a wide range of possible scenarios. This will ensure that the corporation and shareholder rights are protected in the short and long-term future. In our experience, a well-drafted shareholder agreement should include the following terms:

• Identification of the shareholders and parties to the shareholder agreement including the corporation.
• Identification or election of the directors at the time of signing the shareholder agreement.
• Procedures for conducting shareholder meetings and voting rights of shareholders.
• Identification of matters requiring unanimous shareholder approval.
• Identification of various share classes including the number of shares from each class issued to shareholders.
• Determination of procedures for paying out dividends to shareholders.
• Determination of procedures for obtaining future financing.
• Identification of requirements for shareholders to provide financial contributions to the corporation, if any.
• Pre-emptive rights offer existing shareholders the right to have the first option to purchase new shares issued by the corporation.
• Implementation of restrictions on the transfer of shares to third parties.
• Identification of procedures upon the death, disability, or divorce of a shareholder from his or her spouse.
• Identification of procedures for amendments to the shareholder agreement.
• Non-competition, non-solicitation, and confidentiality clauses, as applicable.
• Identification of procedures for dispute resolution between shareholders.
• Remedies for breach of the shareholder agreement.
• Identification of exit strategies for shareholders wishing to leave the enterprise.

HOW WE CAN HELP

When you work with us, our experienced business law team will begin by conducting an initial consultation with you to better understand your business needs and personal situation where a business lawyer will provide you with various options regarding clauses you may want in your shareholder agreement. We will also advise you on your rights as a shareholder and provide recommendations as to the types of clauses we think will best protect your interests. Once we have a clear understanding of your needs, a business lawyer will then draft the shareholder agreement in accordance with your instructions and negotiate its terms with opposing parties as necessary.

For more information about shareholder agreements, we invite you to visit the business law insights section of our website. If you are thinking about entering into a shareholder agreement, call us to book your initial consultation where a business lawyer will answer any questions you may have regarding shareholder agreements.

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FAQ

What is a Unanimous Shareholder Agreement

A unanimous shareholder agreement is a specific type of shareholder agreement that restricts some or all the power and actions of the board of directors and transfers these powers to the shareholders. The use of a unanimous shareholder agreement is permitted by the Canada Business Corporations Act and the Ontario Business Corporations Act. A unanimous shareholder agreement must be signed by all the shareholders. By restricting the powers of the Board of Directors, the shareholders will take on certain personal liabilities otherwise held by the Board of Directors. Unanimous shareholder agreements are generally used in corporations with a small number of shareholders. If you are being asked to sign a unanimous shareholder agreement, we recommend you obtain independent legal advice from an experienced business lawyer prior to signing the agreement.