FAQ On Shareholders Agreement

FAQ Shareholders Agreement

FAQ Shareholders Agreement

What Is A Shareholders Agreement?

When a company has more than one shareholder, what that really means is that the company has more than one owner.

A Shareholders Agreement is an agreement between those owners.

These agreements typically contain various clauses that deal with the management of the company, dispute resolution between shareholders, disposition/transfer of shares, and valuation of shares.

Each company is different, and therefore each Shareholders Agreement is custom-tailored to meet the needs of the parties involved.

If I Am The Sole Director And Sole Shareholder Of My Company, Do I Need An Agreement?

No. You will not need a Shareholders Agreement if you own all the voting shares in the company.

However, if you plan to issue voting shares to another individual or corporation, you should consider preparing a Shareholders Agreement in advance before those voting shares are issued.

Drafting Shareholder Agreements

My Company Only Has Two Shareholders. We’ve Been Operating It Just Fine For The Past Few Years. Should We Get A Shareholders Agreement?

Yes.  Starting a company with somebody is like building a new home.

That home should be built right the first time.

A Shareholders Agreement is not just a contract to prepare when a company is created.

It is a tool to consider before problems occur between shareholders.

Doing business together with a Shareholders Agreement in place is like wearing a helmet when playing hockey.

In the event of an unforeseen accident, you’ll want to be prepared.

If an unforeseen dispute does arise between shareholders, they would first look to the Shareholders Agreement to understand their rights and obligations in that dispute.

What Happens If I Don’t Have A Shareholders Agreement?

Without a Shareholders Agreement, the relationship between shareholders would be governed by the by-laws of the company, and the company’s articles of incorporation.

The by-laws are typically prepared as part of the company’s minute book after the company’s articles of incorporation are issued.

A minute book is a collection of the company’s official records which include articles of incorporation, resolutions of directors/shareholders, ledgers, registers, and share certificates.

What Happens If My Company Doesn’t Have By-laws Too?

If by-laws were not prepared, and the articles of incorporation are silent on resolving disputes between shareholders, those shareholders may need to negotiate with one another.

This negotiation could be difficult to resolve especially if those shareholders hold an equal number of shares in the company.

If those negotiations fail and the matters in dispute remain unresolved, the parties may be forced to enter costly arbitration or litigation; sell the company; or sell their shares.

If I Have A Shareholders Agreement, Will I Need To Change It In The Future?

Like a Last Will and Testament, a Shareholders Agreement is intended to be a living document.

This means that when material changes to the company or shareholdings arise, shareholders should consider the appropriateness of revising their Shareholders Agreement.

How Often Do Shareholder Disputes Arise?

Shareholder disputes can arise at any time and for any number of reasons.

It could arise if one shareholder wants to sell their shares before the company is profitable. It could also arise if one shareholder does not pull their weight in managing the company, but is reaping all the rewards of the company.

Without a carefully drafted Shareholders Agreement in place, these disputes could result in a deadlock between shareholders.

Business and Corporate Lawyer Toronto

Other Than A Tool To Resolve Disputes, What Does A Shareholders Agreement Deal With?

A typical Shareholders Agreement includes the following areas:

  • How existing shareholders can transfer their shares to third parties, other shareholders, or their spouse;
  • How dividends would be declared;
  • How shares would be transferred on the death, incapacity, divorce, or bankruptcy of a shareholder;
  • The rights and obligations of minority and majority shareholders;
  • The rights and obligations of the holders of each class of share;
  • Non-compete and non-solicitation clauses to protect the company;
  • How corporate-owned life insurance would be triggered; and
  • How the corporation would be funded if additional capital is required.

Companies should consider utilizing professional advisors to ensure the rights and obligations of all shareholders are set out in a Shareholders Agreement.

At Hummingbird Lawyers LLP, our Business and Corporate lawyers are experienced and successful in assisting business owners with preparing Shareholders Agreements and resolving disputes among shareholders.

If you are a shareholder seeking to resolve a dispute with another shareholder, we can help you explore your rights and obligations.

Call us today or fill out the form below for more information.

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    Jonathan is an Associate Lawyer in the Wills & Estates and Corporate / Commercial practice groups at Hummingbird Lawyers LLP.

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