What is a Shareholder Agreement?
A shareholder agreement is an agreement between two or more shareholders to deal with various company matters such as buy-outs, death and disputes. Shareholder agreements are highly recommended for all company’s whether small, medium or large. If drafted properly, shareholder agreements can prevent costly litigation between shareholders. Numerous factors play a role in the sections that will be included in a shareholder agreement. Whether the shareholders are in a majority/minority or equal ownership position will affect how the shareholder agreement is drafted.
Potential shareholder agreement exit mechanisms
A shareholder agreement normally provides for a mechanism whereby shareholders can exit the corporation due to retirement, disputes or sale of the business. Buy-out provisions can provide for a right of first refusal exercisable by the remaining shareholders if a shareholder or group of shareholders wish to sell their shares. Buy-out provisions can also provide for a forced sale or purchase of the shares exercisable by a shareholder by establishing a price per share at which either they sell their shares to the other shareholder(s) or purchase the shares from the other shareholder(s). Such shot gun provisions are more advantageous for shareholders that have access to capital and are not advisable for those with less access.
Buy-out provisions dealing with the death of a shareholder are important. The manner in which the buy-out takes place can impact estate administration tax and income tax and needs to be properly drafted to allow for effective tax planning and rollovers. Funding a buy-out on the death of a shareholder is equally as important and should be addressed at the outset.
Using a shareholder agreement to settle disputes
Shareholder agreements can also deal with the dispute mechanism. Whether the shareholders wish to have mandatory mediation, arbitration or remain silent in this respect can be established in a section of the shareholder agreement.
Spousal rights to shares
Shareholders should also give serious consideration to a waiver of spousal rights to the shares of the corporation. Where appropriate, the spouse can sign a waiver under the Family Law Act or the shareholders can agree that a spousal claim to the shares of the corporation triggers an automatic sale of the shares to the other shareholder(s).
Unanimous shareholder agreement
If the shareholder agreement is to be a unanimous shareholder agreement, then the shareholders establish what actions cannot be taken by the corporation without the approval of the shareholders in whichever percentage the shareholders agree on. This removes the liability from the directors when dealing with such actions and places the responsibility on the shareholders.
If you are thinking about preparing a new shareholder agreement or would like to revise an existing shareholder agreement, please contact us to discuss.