Should your Corporation Adopt a Shareholders’ Agreement?

When incorporating a private corporation with multiple shareholders, it is important to consider the merits of adopting a shareholders’ agreement among a few or all of the existing shareholders. Upon incorporation, the Business Corporations Act (Ontario) and the Canada Business Corporations Act govern the rights, powers and duties of the shareholders and directors of a corporation. However, what is often overlooked is the fact that the status quo can be altered by means of a shareholders’ agreement which allows for shareholders to establish their own arrangements as to how a corporation will be owned and managed.

Accordingly, a shareholders’ agreement can be a critical component of a business’ long-term planning as it effectively guards against circumstances which may be unforeseeable in the short- term but have the potential to be detrimental to a business in the long-term. The following is a brief summary of the types of issues that are typically addressed in a shareholders’ agreement.

Shareholder consent requirements restricting the powers of directors:

Rather than have the directors make certain decisions, the shareholders may require that various changes within the corporation only proceed upon obtaining the unanimous consent of the shareholders. These changes may include, but are not limited to, the purchase or sale of a substantial portion of the assets of the corporation, borrowing funds for the corporation, providing loans to shareholders, and issuing additional shares of the corporation.

Purchase and sale of shares by a shareholder:

Shareholders may specify the process by which shares of a shareholder can be sold to another shareholder or a third party. A shareholders’ agreement may include a right of first refusal provision, a piggy-back right which would allow a minority shareholder to sell his/her shares in the event that a majority shareholder sells his/her shares, a call option whereby the corporation could require that one or more shareholders sell their shares back to the corporation, a put option whereby a shareholder could require the corporation to purchase his/her shares, and other similar rights.

Repayment of shareholder loans made to the corporation:

Shareholders may outline how loans made by shareholders to the corporation must be repaid. For example, a shareholders’ agreement may specify that the existing shareholder loans must be paid on demand, at the discretion of the board of directors, out of the corporation’s profits, or by some alternate manner.

Impact of death or marital breakdown on shares:

Shareholders may specify how shares will be dealt with upon the death of a shareholder or upon a shareholder becoming subject to a family law dispute. Provisions that make the purchase of a deceased shareholder’s shares mandatory and outline insurance requirements for each shareholder that would allow for such a purchase to be paid for out of insurance proceeds are commonly seen in shareholders’ agreements. Further, a shareholders’ agreement may also include a provision requiring a shareholder to notify other shareholders if and when a family law action that would have a potential impact on share ownership is commenced.

Non-competition and non-solicitation:

Shareholders may wish to include specific protections in a shareholders’ agreement that are designed to safeguard a business’ long-term interests. Detailed non-compete and non-solicitation provisions aimed at former shareholders can protect a business from competition and guard against the risk of losing valuable customers and employees.

Dispute resolution among shareholders:

Shareholders will often include arbitration provisions in a shareholders’ agreement in order to clarify how potential disputes among shareholders will be dealt with. Establishing the type of dispute resolution process that would be followed in the event of a disagreement among shareholders is yet another aspect of long-term planning that can be quite valuable in a shareholders’ agreement.

Due to the wide range of issues that can be effectively addressed in a shareholders’ agreement, it is advisable for a corporation with multiple shareholders to consider the value of such an agreement. Please note that this is a short summary of provisions commonly included in a shareholders’ agreement. It is not meant to be an exhaustive discussion of all legal aspects of a shareholders’ agreement and is not intended to be legal advice or an opinion on any matter. If you are interested in obtaining more information about shareholders’ agreements, please contact us.

The foregoing should not be considered to be legal advice and should not be relied upon as such. Please consult a lawyer to get advice and an opinion on your unique circumstances.