Why Does Your Corporation Need A Shareholders’ Agreement?

Corporations & Shareholder Agreements

A shareholders’ agreement contains several provisions about the operation of the corporation and the relationship between the shareholders.  These can typically be divided into three categories – Decision Making, Exit Provisions, and Dispute Resolution. Agreements are tailored to the specific requirements and circumstances of a corporation and no two agreements will be identical.  

There are only two instances, in my opinion, when a private company does not need a shareholders’ agreement.  One is when there is only one shareholder, and the second instance is when there are two shareholders and they are married to each other.  In this case, separate agreements will govern how the corporation will be run and/or split up, so there is no need to duplicate efforts with a shareholders’ agreement as well.  

For everyone else, the shareholders’ agreement is like a fire insurance policy or a pre-nuptial agreement, you hope you never have to use it, but you are quite happy you have one if the need arises.  The terms are negotiated at a time when everyone is amicable with each other and there are no catastrophic events occurring and the hope is that it can be put away and never looked at again.  If the shareholders stop getting along, then the shareholders’ agreement will provide the guidelines to follow until the shareholders can get back on the same side, or until they can separate from each other entirely.

Decision Making
As long as the shareholders are getting along, decisions about the business are made in the ordinary course.  They send emails, chat by phone, or have in person meetings to discuss how the corporation should be run and when and how money should be spent.  Even if the shareholders deviate from the exact provisions of the shareholders’ agreement, if everyone is on board, then there is no problem.  But when disagreements start popping up, the shareholders’ agreement will set out who will be a director, how meetings can be called, how many signatures are required on contracts and cheques, and what percentage of votes are required to pass a resolution.  

Exit Provisions
There may be a time when it is no longer possible for the shareholders to be part of the company together.  If the parties are able to come to an agreement on who should leave and who should stay, and how much consideration will be paid to the departing shareholder for his/her shares, then they are free to make that deal, but if they are not speaking to each other, it can be difficult to negotiate terms.  The shareholders’ agreement will provide the terms for an exit by one or more shareholder, either through a sale/purchase between the shareholders, or to a third party.  The shareholders’ agreement also provides for what happens if a shareholder dies, goes bankrupt, or is unable to continue working in the business due to a disability.

Dispute Resolution
A shareholders’ agreement can provide that any problems between the shareholders are to be dealt with by a mediator or an arbitrator rather than going to court. Using these alternatives to a court of law means details of the dispute are kept private, the time for resolving the matter is expedited, and the ability to name or provide qualifications of the decision maker.  

If you do not have a shareholders’ agreement, or the circumstances of your corporation have changed, contact Keyser Mason Ball, LLP, to discuss what structure and provisions would be appropriate for you.

If you have any questions relating to any of the above, please do not hesitate to contact Sarah MacDonald at smacdonald@kmblaw.com or 905.276.0416.