Corporate Law Author: Andrew Hennigar & Mike Weber Imagine a time and place where all of your company’s co-owners (shareholders) are working harmoniously and completely agree on the company’s course. For many co-owners at the start of their company’s lifecycle, this is the reality and a fantastic place to be. However, for most, there will be hiccups along the way and it is critical that co-owners be mindful from the outset of the obstacles and disputes that they may need to navigate down the road. To alleviate these challenges, we typically recommend that co-owners of a business enter into a shareholders’ agreement which outlines the business deal and expectations of all shareholders. Shareholders benefit from certain minimum corporate law protections that apply to all companies. The value and primary purpose of a shareholders’ agreement lies in its ability to supplement legislation to provide additional or tailored protections and mechanisms to deal with unique and important issues before they become problems. A shareholders’ agreement is especially critical where the company is private. Shareholders’ interests and motivations may vary or diverge over time and simply selling your way out of a disagreement is not an option as it may be with a publicly traded company. An effective shareholders’ agreement clearly delineates the relationship among shareholders in respect of a number of issues including:
  • Governance/composition of the board of directors;
  • Special voting or approval thresholds regarding major business decisions;
  • Setting a dividend policy;
  • Restrictions on the transfers of shares of the company;
  • Rights and obligations in a sale of the company or its assets;
  • Financing the company;
  • Determining the conditions under which a shareholder can exit; and
  • How a shareholder’s interest will be disposed in the event of an intractable disagreement or death.
Preparing a shareholders agreement requires all parties to discuss their expectations with their legal counsel and with each other, and to set out in writing their understanding of the business deal with respect to the conduct of the affairs of the company. There is no one-size-fits-all approach to preparing a shareholders’ agreement, and each of the matters noted above may be resolved in innumerable ways given the needs and make-up of the shareholder group. While the cost of completing a shareholders’ agreement can be significant in the early days of a company’s existence, business owners must weigh this initial business cost against the potential costs resulting from a shareholder dispute which could paralyze the business and/or become the subject of litigation. The shareholders’ agreement does not appear on your company’s balance sheet but it constitutes a valuable asset which you can use to ensure your company prospers. Interested in hearing more? Don’t miss our upcoming webinar, Building Blocks: Structuring & Organizing Your Company, jointly presented with Boast Capital from 11:00 am – 12:00 pm PST on January 21, 2016, or contact MEP Business Counsel at 604-669-1119. To participate in the webinar register here. This post is for informational purposes only and does not constitute legal advice or an opinion on any issue. If you are interested in receiving additional details on the topic above or advice about specific circumstances, please contact MEP Business Counsel at 604-669-1119.