Shareholder Agreements: A Primer
What is a shareholder agreement?
A shareholder agreement is an agreement between the shareholders of a corporation establishing the rights of the company’s shareholders as well as the management of the corporation.
Why is it important to have a shareholder agreement?
The shareholder agreement is intended to ensure that shareholders are treated fairly and that their rights are protected for the lifetime of the agreement. Provisions dealing with shares may, for example, allow existing shareholders to maintain their percentage of shares, or have the first right of refusal to any shares being sold, thus preventing unwanted third parties from becoming new shareholders or gaining control of the corporation. Similarly, provisions dictating the organization of the company may also be used to protect shareholders (e.g. through mandating the amount and timing of dividends instead of leaving that power to the discretion of the Directors, or through requiring that certain decisions require a higher percentage of approval than set by provincial or federal statues).
Perhaps most importantly, in the event of dispute, the shareholders agreement provides clarification of the rights and obligations of all parties. Thus, a shareholder agreement must anticipate reasonably likely events in the corporation’s future. Not having such an agreement, or having a poorly drafted agreement can lead to disputes, and possibly corporate failure.
What terms does a shareholder agreement usually cover?
A shareholder agreement commonly sets out:
- Shareholder rights regarding the buying, selling, issuance and distribution of shares
- The number of Directors on the Board, their compensation and duties
- The duties of Officers and other management personnel
- What will happen in the event of death or retirement of a shareholder
Shareholder agreements should deal with the current and anticipated needs of your specific corporation. For example, with small corporations, it is common to have a shareholder agreement allowing each shareholder or their appointed representative to have a seat on the Board of Directors.
Nick Wright is a Toronto business lawyer experienced with drafting shareholder agreements. Contact him now at nick[at]wrightbusinesslaw.ca to arrange a time to discuss protecting your company and its shareholders with a shareholders agreement.
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