When a company is incorporated, you and your fellow owners 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 going to be massive ups and downs. For this reason, it is very important to have a plan in place from the beginning, dictating what can happen during potential future conflicts, minimizing risks.
What if one of the shareholders wants out of the business? What happens if one of the shareholders attempts to force another shareholder out?
This is where shareholder agreements come into play.
A shareholders’ agreement is a contractual document between the company and the shareholders of the company, setting out the legal rights and responsibilities of each party in relation to one another. A well-drafted shareholders agreement should cover a variety of potential situations.
Common Provisions Included:
- governance structure and procedures
- share transfers and restrictions
- changes in ownership
- death or incapacity of a shareholder
- major disputes
- 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.
Benefits of Shareholders’ Agreement
One of the main benefits to a shareholders’ agreement is the protection of minority shareholders, as minority shareholders are particularly vulnerable without a lot of influence in larger decisions. 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 when 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 estate planning.
Any corporation with more than one shareholder should consider having a shareholders’ agreement in place in order to set out clear expectations of the parties from the beginning – this will help to save money, time, and stress down the road. Given the diversity of situations and objectives, from smaller family owned businesses with few owners, to larger, high tech corporations with multiple owners, it is important to consult with legal counsel to ensure each party’s needs are met.
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.