Great news: you’ve just taken the plunge and officially established a business with several shareholders. Congrats!
While incorporating your business makes it easier to raise capital while limiting liabilities, it’s ideal to add another layer of protection to lower the occurrence of disputes between shareholders.
That’s exactly why a shareholders’ agreement (SHA) isn’t just a recommended practice; it’s fundamental for the smooth operation and longevity of any business. Just like any business partnership, an SHA requires transparency regarding expectations to truly thrive. By delineating the shareholders’ rights, privileges, and obligations in written form, the chance of any dispute in the future is significantly reduced.
Want to know more about shareholders’ agreements? Read on to learn about the ins and outs, and why they should always be adopted into a business plan after incorporation.
What is a shareholders’ agreement?
According to the Canadian government, a shareholders’ agreement is “an agreement entered into by some, and usually all, of the shareholders of a corporation,” and “must be in writing […] signed by the shareholders who are party to it.”
Think of an SHA as a prenuptial agreement for your business: it’s better to establish important decisions regarding your company’s future when all stakeholders are in agreement and before any unforeseen conflicts surface.
However, it’s important to note that there’s no legal requirement for a shareholder in a corporation to participate in such an agreement. The agreement’s content can be adaptable and tailored to align with the preferences and requirements of both the shareholders and the business.
What are the benefits of shareholders’ agreement?
Considering that you have an incorporated business, it’s easy to assume that you and your shareholders are in agreeance with the management of the business.
Nevertheless, a shareholders’ agreement ensures clarity in addressing specific concerns and establishes a platform for resolving complications, should they emerge in the future. Investing the time to engage in discussions about certain issues can significantly reduce conflicts amongst shareholders and foster a shared understanding from the outset.
Here are the top 5 benefits of shareholders’ agreement:
- Clarity: A shareholders’ agreement serves as a blueprint for the framework that defines the rights and responsibilities of shareholders. It can outline every detail of the management structure such as the roles and functions of the board of directors, which prevents potential confusion about each party’s designated responsibilities.
- Decision Making: In the absence of a shareholders’ agreement, shareholder influence is typically confined to tasks like electing directors, amending Articles of Incorporation, and reviewing financial statements. However, this agreement allows shareholders to expand their voting rights and prerequisites for various decisions. For example, standard corporate decisions often require a majority vote (51%) to make any kind of decision, but decisions regarding the fundamental aspects of a corporation require a “special majority,” amounting to two-thirds (66.67%) of votes. A shareholders’ agreement can raise this threshold to 75% or even a unanimous consensus. A consensus like this can be helpful in safeguarding minority shareholders against major alterations to the corporation’s main operations.
- Dispute Resolution: Disagreements among shareholders can cause significant damage to businesses. A well-crafted shareholders’ agreement can incorporate a number of dispute-resolution mechanisms. For instance, the agreement might stipulate that parties engage in negotiations mediated by a third party before resorting to public litigation, or opt for private arbitration as a cost-effective and confidential alternative to public legal proceedings.
- Transfer Control: In the absence of suitable, pre-emption provisions within an SHA, shares can be freely transferred. This means that a shareholder has the freedom to sell or transfer their shares to an entirely unfamiliar individual, potentially even a competitor. A shareholders’ agreement can introduce a way to address this scenario by granting the existing shareholders the “right of pre-emption” over these shares if one shareholder intends to sell or transfer them. Should they choose not to exercise this right, the SHA would mention a clause mandating the recipient of the shares to enter into a “Deed of Adherence.” This deed obligates the new shareholder to adhere to the terms outlined in the existing shareholders’ agreement, offering reassurance to the other shareholders by ensuring the newcomer abides by the agreement’s rules.
- Exit Strategies: A shareholders’ agreement should list various exit strategies for situations where shareholders can no longer be in business with each other. At the beginning of incorporation, the shareholders should’ve already discussed courses of action if:
- Their working relationship was to fizzle out;
- A shareholder had been compelled to relocate elsewhere; or
- If a shareholder simply desired to discontinue their involvement in the business.
By establishing these terms early on, prolonged and costly negotiations down the line can be avoided among shareholders.
In a shareholders’ agreement, every party is invested in the venture’s success. However, it’s essential to thoroughly address the details of the business to prevent ambiguity and outline proper expectations.
Remember, an agreement automatically translates into a legally binding contract when it’s in writing. Crafting an enforceable agreement requires professional input from accountants and experienced attorneys. If you need guidance, you can schedule an appointment through our website. We can help you design a suitable plan for you and your partners, connect you with the appropriate legal experts, and ensure your business adheres to tax regulations.