A shareholders’ agreement is a customizable agreement made among the shareholders of a corporation that serves as the foundation for how a corporation or group of corporations will be governed. It codifies each shareholder’s rights, privileges, and obligations in respect of a corporation or group of corporations. While not required by law, a shareholders’ agreement is an effective tool used by many private corporations with multiple owners.
Without a shareholders’ agreement in place, the default rules under provincial or federal corporate law, as applicable, and the common law, will apply. While such corporate laws provide some guidance, they are generalized rules that often do not sufficiently address all the specific needs of a corporation with multiple owners.
Governance and Decision-Making
A well-structured shareholders’ agreement provides a thorough governance framework for the corporation. A shareholders’ agreement will typically outline how key business decisions will be made (including by both shareholders and directors), any special rights of parties with respect to decision-making (e.g., rights of certain shareholders to appoint director nominees), and what thresholds are required for passing shareholder resolutions or director resolutions on various corporate matters. Clear governance provisions help to align the expectations of shareholders and minimize deadlock situations where disagreements could impede a company’s ability to make important decisions.
Transfers of Shares; Buy-Sell Provisions and Exit Strategies
A primary function of a shareholders’ agreement is to establish clear mechanisms for the sale or transfer of shares. The agreement can define who is entitled to own shares (directly or indirectly). The agreement can also define how shares will be valued, the conditions under which they can be sold, and whether existing shareholders have the right to purchase shares before they are sold to a non-shareholder. These mechanisms protect a company from potentially destabilizing ownership changes and ensure that shareholders are aligned if they would like to exit the business or make other major corporate changes, such as an initial public offering.
Dispute Resolution Mechanisms
Dispute resolution mechanisms found in shareholders’ agreements typically involve mediation or arbitration clauses, or other informal solutions. These mechanisms encourage shareholders to seek a fair and efficient resolution with the help of a neutral third party. By specifying dispute resolution methods in a shareholders’ agreement, shareholders and directors can limit time-consuming and expensive court battles and reduce the reputational damage that public litigation might cause.
Succession Planning
A shareholders’ agreement can be helpful in ensuring the long-term stability of a company. It often includes succession planning provisions that detail the steps to be taken if a key shareholder dies, becomes incapacitated, or decides to retire.
Other Provisions
As mentioned, a shareholders’ agreement is a highly customizable document. This allows bespoke clauses to be included to address unique arrangements among parties such as insurance arrangements, special dividend entitlements or other understandings that the parties would like to see codified in a binding agreement.
Conclusion
For private corporations with multiple shareholders, a shareholders’ agreement is an essential tool for preventing conflicts, ensuring the smooth governance of the company, and succession planning. The agreement serves as a safeguard for both the shareholders and the company. It not only mitigates risk, but also promotes a cohesive and well-managed business environment, assisting in the corporation’s long-term success.
This publication is intended for general information purposes only and should not be relied upon as legal advice.
