In this article, we delve into what a Shareholders' Agreement is, its key components, and the risks it addresses.
When two or more individuals go into business they often incorporate a corporation, elect directors, issue shares, and start operations without further thought to the rules that will govern their business. But what happens if someone wants to leave the business? Or if someone takes the corporation's idea and starts their own business? It's best to address these questions and mitigate such risks at the outset of the business and while parties are friendly.
What Is a Shareholders' Agreement?
A Shareholders' Agreement is a legally binding contract among the shareholders of a corporation. It serves as a roadmap for the management and operation of the company and outlines the rights, responsibilities, and obligations of the shareholders. While not a mandatory requirement under Ontario's corporate law, having a Shareholders' Agreement is highly recommended for any corporation with more than one shareholder.
Do I Need a Shareholders' Agreement?
Some of the key risks addressed by a Shareholders' Agreement include:
- Disputes Among Shareholders: By providing clear guidelines for resolving disputes, a Shareholders' agreement helps prevent conflicts that could disrupt the business operations and damage shareholder relationships.
- Exit Strategy: In the event of a shareholder's desire to exit the company or in case of unforeseen circumstances such as death or incapacity, a Shareholders' Agreement promotes a smooth transition and protects the interests of the remaining shareholders.
- Protection of Minority Shareholders: Minority shareholders are particularly vulnerable to being marginalized in decision-making processes. A well-crafted Shareholders' Agreement can include provisions to safeguard their rights and promote their fair treatment.
- Preservation of Confidential Information: Confidentiality clauses protect sensitive information from being disclosed to competitors or unauthorized parties, safeguarding the corporation's property and competitive advantage.
Contents of a Shareholders' Agreement.
The contents of a Shareholders' Agreement vary depending on the specific needs and circumstances of the corporation and its shareholders. However, some common provisions typically found in a Shareholders' Agreement include:
- Shareholder Rights and Obligations: This section outlines the rights and obligations of each shareholder, including voting rights, dividend entitlements, and obligations to contribute additional capital.
- Management and Decision-Making: The agreement specifies how the company will be managed and the important decision-making processes, such as the appointment of directors, approval of budgets, and major business transactions.
- Transfer of Shares: This section addresses the circumstances under which shareholders can transfer their shares, including any restrictions on transfers and rights of first refusal. It may also create circumstances where an individual must sell their shares, such as upon leaving the employ of the corporation, and the share value of such repurchases.
- Dispute Resolution: A crucial aspect of any Shareholders' Agreement, this section outlines mechanisms for resolving disputes among shareholders, such as mediation or arbitration, or mandatory buy-sell provisions, to reduce the risk of litigation.
- Confidentiality and Non-Competition: This clause protects the corporation's sensitive information and prevents shareholders from competing with the company during and after their tenure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.