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An Entrepreneur’s Guide to Shareholder Agreements

Overview

Toronto business lawyer, Antonio DiMinno, of DiMinno Rizzi Lawyers, provides a basic overview of shareholders’ agreements. Shareholders’ agreements all have certain key elements that all entrepreneurs should consider and discuss when going into business with others.

What is a Shareholders Agreement?

A shareholders’ agreement is a binding agreement between two or more owners of a business that sets out how the company will be managed and operated. It’s like a roadmap that outlines the expectations, rights, and responsibilities of each shareholder, and helps to ensure that everyone is on the same page. For an overview of the shareholders see: Corporate Governance Basics Part 1: The Shareholders.

Imagine you are on a hockey team. You all own the team and have a say in how it’s run. But just like in hockey, it’s important to have a game plan in place so everyone knows what to expect and how to work together.

That’s where a shareholders’ agreement comes in. It’s like a special playbook for the team owners. It’s a binding agreement that outlines how the team will be managed and operated. It covers things like who gets to make decisions, how profits will be shared, and what happens if someone wants to leave the team. This helps avoid conflicts or disagreements by making sure everyone knows their rights and responsibilities.

Just like in a game, it’s important for all team members (or shareholders) to be on the same page and work together towards the same goals. The shareholders’ agreement is the roadmap that keeps everyone focused and helps the team (or business) run smoothly.

Do I need a Shareholders’ Agreement?

As a corporation, you are not required by law to have a shareholders’ agreement.

However, having a shareholder’s agreement can be very beneficial for the smooth operation of your company. Think of being on a pro team that has no game plan, no coach, and where the players keep changing positions whenever they feel like it. That’s not a winning formula! A shareholders’ agreement is a valuable tool to protect the interests of shareholders and avoid disputes that could otherwise arise.

Key Considerations when Creating a Shareholders’ Agreement

Shareholders’ agreements vary widely in complexity depending on the nature and size of a company. However, here are some considerations that all shareholders’ agreements should address:

 

  1. Share Ownership and Structure: The agreement should define the share structure of the corporation and the ownership of the shares among the shareholders.
  2. Define dividend and distribution policies: As a close corollary to #1, the shareholders agreement can define the policies for the distribution of profits to shareholders, including any restrictions on dividends or distributions.
  3. Provide a framework for decision-making: The agreement should address how decisions will be made and who has the power to make decisions for the corporation.
  4. Management and operations: The agreement should define the roles and responsibilities of the shareholders and management, including the appointment and removal of directors and officers. For more on the directors and officers see here: hyperlink to other articles.
  5. Address exit strategies and transfer restrictions: A shareholders agreement should address exit strategies for shareholders, including the sale or transfer of shares of the corporation and any buyout provisions. It may also contain restrictions on the transfer of shares, for example a right of first refusal provision.
  6. Non-solicitation: this prohibits shareholders from soliciting the company’s clients, customers, employees, or vendors for a certain period of time after they leave the company. This protects the company’s business interests and prevents shareholders from using their knowledge of the company to compete against it or harm its reputation.
  7. Non-Competition: this prevents shareholders from competing with the company for a certain period of time after they leave. This protects the company’s business interests, trade secrets, and goodwill.
  8. Financing and capital structure: The agreement should address how the corporation will be financed, including the issuance of new shares, capital contributions, and borrowing.
  9. Dispute Resolution: The agreement should address how disputes among shareholders will be resolved, including dispute resolution mechanisms such as mediation or arbitration. Where there is a deadlock, the agreement may have a buy/sell provision (aka the “shot-gun clause”).
  10. The Three “Ds” – Death/Divorce/Disability: what happens in a situation where one of the shareholders gets divorced, is disabled/incapable, or dies? Does a spouse of a shareholder become a shareholder? How will the shares be valued in the case of divorce, disability or death.

 

These items are a great starting point to discuss with your company’s shareholders.

How a Shareholders’ Agreement Lawyer Can Help

When considering a shareholders’ agreement for your business, a great first step is to speak to a shareholders’ agreement lawyer.

A good shareholder agreement lawyer or business lawyer will work closely with you to clear the fog and ensure that your company is sailing in the right direction!

 

Antonio DiMinno

647-205-9128

antonio@drlawyers.ca

Contact us today for a free strategy session!

 

Disclaimer: All number figures are approximate only and may be subject to change. Like all material on this website, this is not financial, legal, or tax advice. Contact a professional for your specific situation. 

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