THE SHAREHOLDER AGREEMENT – GENERAL CONSIDERATIONS
The genesis of all corporate power resides with shareholders. Corporate structure requires that shareholders elect directors, and that directors appoint officers. Once appointed, these directors and officers constitute management of the corporation, engage in corporate decisions and direct corporate action. In many cases, and generally true of start-ups, the shareholders themselves are directly involved in the management and decision-making.
The obligations and rights of shareholders should be defined in a Shareholder Agreement to help avoid serious disputes and confusion that can lead to business failure.
Some portray the Shareholder Agreement as a pre-nuptial among corporate partners. I disagree with this analogy. In marriage, a pre-nup comes into effect upon a breakup. While exit strategy is an important element of a Shareholder Agreement, more importantly, the agreement in its entirety regulates the relationship during the shareholders’ ‘marriage’. A well-drafted Shareholder Agreement should ensure, to the extent possible, that all bases of conflict and dispute are addressed before they arise.
In some corporations, the Shareholder Agreement “restricts, in whole or in part, the powers of the directors to manage the business and affairs of the corporation”, as stated in the Ontario Business Corporations Act (s.108(2)). To the extent it does, the agreement is Unanimous Shareholder Agreement (USA). A USA effectively permits shareholders to usurp the powers of directors in one or more respects. This could result in director liability being imposed onto the shareholders. Moreover, such a shift of control could also have tax implications. A lawyer or accountant should assist you in understanding the possible effects and consequences of a USA.
The Shareholder Agreement should thoroughly address as many issues as possible that are relevant to shareholders, such as:
- Voting rights, including quorum requirements, casting vote, voting trusts, etc.
- Restricting share transfers
- Rights of first refusal on any disposition of shares, pre-emptive right to purchase shares before they can be issued to other persons or entities; piggy-backs that give minority shareholders the option to sell their shares together with the selling shareholder at the same price per share and on the same terms; and drag-alongs that require all shareholders to vote in favour of a purchase of all or substantially all of a corporation’s shares or assets
- A shotgun clause is a requirement by one shareholder to another to purchase shares at a stated price, failing which the first shareholder must purchase the shares of the second shareholder at the stated price
- Granting certain shareholders, for example those significant shareholding, approval rights over substantial transactions or indebtedness
- Right to receive certain financial and other information regarding the corporation beyond the minimum statutory disclosure obligations
- Dealing with shareholders as employees
- Use of insurance in the event of death or disability
- Insolvency or bankruptcy of a shareholder
- Share valuation
- Effect of matrimonial conflict on the shareholdings of a corporation
- Conflict-resolution mechanisms including court, mediation and arbitration
- Capital calls, personal guarantees and contribution
Large or small, a non-public corporation should consider a Shareholder Agreement to provide structure and facilitate the smooth operation of the company – both for today and the future.
© 2014 Adam Wiseberg. All rights reserved.
By Adam Wiseberg
Email: firstname.lastname@example.org; (p) 613-680-1333
The information provided herein is provided for informational purposes only, does not constitute legal advice, and should not be solely relied on to make legal decisions. Please contact a legal professional before acting or abstaining from acting based on the information provided herein. The foregoing does not constitute a solicitor-client relationship between you and any of the legal professionals at the law offices of Adam Wiseberg. You do not have a solicitor-client relationship with any legal professionals at the law offices of Adam Wiseberg unless you have formally retained that person as legal counsel.