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Shareholder Agreements

For a corporation that has more than one shareholder, it is often very beneficial that a unanimous shareholder agreement be entered into which is signed by all of the shareholders of the corporation. A shareholders agreement is a contract which typically governs the voting rights attributable to the shares held by the shareholders of the business, and matters relating to the management and affairs of the corporation by the directors of the business, whose powers can be restricted by such an agreement.

It should be noted that there is no standard shareholders agreement. Rather, each shareholders agreement should be tailored according to the specific facts of the situation and needs of the corporation and its shareholders. A shareholders agreement should clearly outline what the shareholders have agreed to in advance upon the occurrence of a variety of events. One major benefit of having a shareholders agreement is that it gives the shareholders the opportunity to think through many scenarios that may occur, and such a process can unveil many unspoken assumptions on important issues.

Although each shareholders agreement should be made for its particular purposes, most agreements cover common issues such as:

  • What happens if a shareholder wants out of the business and wishes to sell his or her shares? What about third-party offers? – Is there is a right of first refusal?

  • Is there a “shotgun clause” dealing with ownership buyouts?

  • Who has authority to make important decisions?

  • What mechanism is in place in case there is a dispute? Arbitration?

  • What is the total financial exposure and legal liability of the shareholders?

  • How is the Board of Directors determined?

  • Can a shareholder be forced out of the company?

  • What is the ownership structure of the company?

  • Who are the officers and managers?

  • How is a quorum for meetings determined?

  • Are there restrictions on offering new issues of shares (e.g. anti-dilution clause, tag-along provisions, pre-emptive rights)

  • What are the shareholders commitments to the company? (e.g. disclosure of any conflict of interest)

  • What happens if a shareholder passes away or is incapacitated?

  • Are there management contracts? What do such contracts say about confidentiality and non-competition?

  • What happens if the company requires further funding to maintain operations? How is the obligation to provide such funding distributed among the shareholders?

  • Are there shareholder loans to the company, and if so, how are those obligations handled

  • How is the valuation of a share determined?

  • Do shareholders require life insurance?

  • Does the company require insurance? If so, what kind?

  • How will the officers and directors be compensated?

  • What decisions require unanimous shareholder or board approval?

  • What events call for the dissolution of the business?

  • What happens if a shareholder breaches the agreement?

As part of the process in drafting the agreement, each shareholder should obtain tax advice from his or her accountant or tax advisor to ensure that future earnings are appropriately dealt with.

The process of drafting a shareholders agreement is extremely useful because it allows the opportunity for the shareholders to thoroughly and honestly evaluate their roles and commitments to each other and to the corporation. It is also an opportunity to for the shareholders to gauge the interests and motivations of their fellow shareholders prior to the occurrence of certain events.

This article was written by Jindra Rajwans, a business and entertainment lawyer based in Toronto, Canada. The information in this article is not intended to be legal advice and is of a general nature. Consult a lawyer for advice for any specific situation.

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