Drafting Shareholder Agreements



While no government statutes state that a Shareholder Agreement is necessary for your business or company, it can be extremely crucial to have one in place when there is more than one shareholder in a corporation.

The main purpose of a shareholder agreement is to prepare for future events or contingencies that are common in business ownership and company progression. Having the shareholders agree on rules to govern disputes, as well as their relationship as co-owners throughout different scenarios and under unique circumstances is prudent corporate planning that should not be avoided.

Drafting Shareholder Agreements

Making big decisions after a working relationship has collapsed can result in emotionally-driven, imbalanced, power struggles.  Establishing these rules while the relationship is functioning is much easier to do than when the relationship is damaged, or beyond repair. This is something that lawyers keep in mind when drafting Shareholder Agreements; what circumstances and scenarios need to be considered for the duration of the relationship, and included in the agreement?

In order to prepare for these unique scenarios, a lawyer must sit down and learn as much as possible about their clients entering into an agreement. This can include their objectives, needs, any related information regarding their business and their risk issues. This ensures that, while used in conjunction with other legal forms, the completed document for the agreement can address each particular client’s own circumstances and needs throughout the partnership.

Drafting Shareholder Agreements

Issues To Consider When Drafting A Shareholder Agreement

One of the main objectives in a Shareholders’ agreement is to cover provisions of management control. These provisions generally cover two areas:

  1. Matters which relate to the duties and rights of directors.
  2. Matters which relate to the rights of shareholders.

In order to draft these control provisions, there are two common approaches to consider for a Shareholders’ agreement. One is to ensure that there is a preservation of the status quo between the majority and minority, and the other is used to attain certain objectives that have previously been laid out. While both approaches seem straightforward, it can be nearly impossible to predict which approach would be more beneficial.

With this in mind, a combination of the two approaches can be the most effective measure to take. This can help cater to the variants in the agreement such as the particular interests of parties involved, the number of those involved and their relationship in regards to control issues.

Of course, there are also many issues that can come up during the drafting process:

Management Issues

  • Filling Vacancies on the Board
  • The topic of money lending
  • Enactment of by-laws
  • Issuing/transferring shares
  • Declaration of dividends
  • Meetings of directors
  • Hiring/Firing of key employees
  • Chair’s casting vote
  • Shareholders as employees

Shareholder Issues

  • Election of directors
  • Voting on ratification of by-laws
  • Voting on continuance or dissolution
  • Voting with respect to sale or exchange of corporate assets
  • Meetings of shareholders
  • Pledging of shares by shareholders
  • Dividends and Payouts
Business & Corporate Lawyers

Things To Keep In Mind

While this may be a brief summary, it goes to outline what goes into the drafting process of a Shareholders’ Agreement. There are not only legalities that are addressed for a company to continue running if a relationship turns sour, but there are a multitude of issues and needs that should be covered for each individual shareholder. In order to address these issues, and know what you need to include in your draft, seeking legal counsel can be the most important step you take.

If you’re looking for skilled and experienced lawyers in Vaughan or lawyers in Toronto, Hummingbird Lawyers LLP has offices at each location for your convenience.

The Business & Corporate Law team at Hummingbird Law has the tools and experience to help you draft an agreement that will cover your interests and outline provisions for any issues that may arise with management or shareholders. Contact our Business & Corporate lawyers at Hummingbird Lawyers LLP today, so that you can lay the groundwork for your Shareholders’ Agreement.

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