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Be Prepared: the Importance of Shareholders’ Agreements

Be Prepared: the Importance of Shareholders’ Agreements

When a company is incorporated, you and your fellow owner/s may be getting along well – after all, you made the decision to start a business because your ideas and vision were aligned. However, like any relationship, there are likely to be ups and downs, and it is important to have a plan in place from the beginning to dictate what can happen during those downs to minimize risks.  What if one of the shareholders wants out? What if one of the shareholders wants to force another shareholder to leave the company?

Enter shareholders’ agreements. A shareholders’ agreement is a contractual document between the company and the shareholders of the company that sets out the legal rights and responsibilities of each party in relation to one another. A well-drafted shareholders agreement should provide for a variety of situations – some of the more common provisions address governance structure and procedures, share transfers and restrictions, and what happens if certain future events occur, such as disputes, changes in ownership, death or incapacity of a shareholder, or sale or dissolution of the company.

The agreement should be carefully drafted to ensure it balances the unique and often diverse objectives of the company and the shareholders, while managing risks and preserving benefits. The goal is to provide a transparent and fair way to deal with future contingencies and conflict.

One of the main benefits to a shareholders’ agreement is the protection of minority shareholders, as minority shareholders are particularly vulnerable. Tools can be built into the document to minimize inequality. For example, protections such as “tag-along” rights can be included in a shareholders’ agreement, allowing minority shareholders to participate in a share sale if a majority shareholder seeks to sell its shares to a third party.

Crafting a shareholders’ agreement also presents shareholders with an excellent opportunity to consider wealth preservation of the company, including tax efficiency and succession planning.

Given the diversity of situations and objectives, from smaller, family owned businesses with few owners, to larger high tech corporations with many owners, any corporation with more than one shareholder should consider having a shareholders’ agreement in place to set out clear expectations of the parties from the beginning. Ultimately, by spending a little bit of extra money up front, you may stand to save considerable costs, time and stress down the road.

The foregoing is intended for general information purposes only and should not be construed or relied upon as legal advice. If you require legal advice, please contact the author who would be pleased to discuss the issues above with you, in the context of your particular circumstances.

Danielle Marshall is a real estate, business, and estate planning lawyer at Doak Shirreff Lawyers LLP. Click here to connect with Danielle. She can also be reached at [email protected] or (250)979-2524.