A shareholders agreement is a legal document between the owners (shareholders) of a company that is typically prepared when forming a new business, protecting the individual investments of the shareholders of a company and outlining how that company is to be managed. A Shareholders Agreement is the agreements, requirements and restrictions between those owners.
A shareholders’ agreement is the best way to reduce business disputes between owners. It clarifies how decisions will be made and provides a framework for dispute resolution, which is especially important when it comes to handling and making decisions that may affect the success and ultimately the value of the company.
A shareholders’ agreement is a vital contract between a corporation and its shareholders that outlines what activities each entity may or may not do. It establishes the rights of the shareholders and the extent of the duties and powers of the board of directors and management.
Moreover, a shareholders’ agreement also stipulates how a company’s procedural tasks will be run, ensuring smooth business operations. For example, this may include:
From dispute mechanisms to exit strategies through to wider matters of corporate governance, we advise on shareholders agreements depending on the specific obligations relevant to each individual situation. Since each company is different, each Shareholders Agreement should be custom-tailored to meet the specific agreements and needs of the owners involved.
The best performing companies do not stand still and we appreciate that maximizing operations can require change. We advise on a range of strategic decisions including implementing capital reductions to increase shareholder value and intragroup reorganization to structure a company more efficiently.
While there is no legal requirement in Ontario or Canada for the shareholders of a company to enter into a shareholders agreement, it is generally a good idea to have a shareholders agreement wherever you have a company with more than one shareholder.
Below is a list of some of the most common benefits that our clients’ usually experience when forming a Shareholders Agreement:
While each client has its own unique circumstances, below is a list of the of the services that we provide when we assist our client’s with forming a Shareholders Agreement:
A well-drafted shareholders agreement is customized to each individual business and its unique goals. Keen investment in the day-to-day helps us to develop extensive knowledge of our clients’ businesses, inside and out.
Whatever their next steps, we are ready to take them together. Our ongoing corporate support to both directors and shareholders, and their group companies draws on expert advice from practice areas across the firm resulting in a consistent multi-disciplinary approach.
No, there is no obligation under Canadian law for companies to enter into Shareholders’ Agreements,
but most do as it safeguards the future of their businesses. When companies grow, their day-to-day and financial operations become more complex and unforeseen issues may arise, which is why a good Shareholders’ Agreement is valuable to set in place from the start.
It’s all too easy for a company’s financial success to be hindered by death, divorce, disability,
disputes and divestiture – all of which a shareholders’ agreement can prevent from happening. That’s why if you have two or more shareholders in your company, it’s almost always a good idea to have a
solid Shareholders Agreement to protect each shareholders.
No. If you are the sole owner of a company, you do not need a Shareholders Agreement.
However, if you plan on later issuing shares to another individual or corporation, for example, an investor in your company, then you should consider preparing a Shareholders Agreement before the other owners get involved in your company.
If you wait until after another owner get involved your company, you will need this new owner to agree to enter into a Shareholders Agreement.
To avoid getting stuck, it is usually best practice to require that an investor sign a Shareholders Agreement BEFORE they receive shares in your company.
The short answer is yes.
When business is doing great, then everything’s great – and you’re not worrying about what will happen when things go wrong.
However, when something in your business goes terribly wrong, then your partner who was previously your friend may become your enemy.
We’ve seen this time and time again, and we would hate to see you go through this as well.
Without a Shareholders Agreement, two partners in a business are stuck. Unless you both agree to a path of action, you can’t force the other partner to exit, to sell their shares or to do anything else.
Shareholders Agreements are powerful because they are highly customizable. This way, you can agree in advance how you are going to handle certain situations before they arise, and without having to ‘throw the baby out with the bath water’, as they say.
Without a Shareholders Agreement, the relationship between shareholders in a company will be governed by the default rules in Corporate Law, the company’s articles of incorporation and the company’s by-laws.
While Corporate Law is helpful to some degree, there are many situations that Corporate Law does not address because it is meant to simply provide a last ditch safety net.
Also, when you default to Corporate Law, you are choosing to default to using court as a remedy – this means expensive lawyers, long drawn out lawsuits, a lot of money being spent and a lot of time being wasted.
Lastly, keep in mind that you cannot force an Owner or Shareholders out of your company! Once a Shareholder has shares, and unless a Shareholders Agreement says otherwise, they are a Shareholder for life.
All of these negative consequences can be avoided with a Shareholders Agreement.
Shareholders Agreements are the equivalent of having a will for your business – when your business changes, so too should your Shareholders Agreement.
If you do not regularly update your Shareholders Agreement, then you could have processes, requirements and procedures in your Shareholders Agreement that don’t adequately address the current state of your business’ affairs.
The good news is that updating a Shareholders Agreement is easier and cheaper then preparing one from scratch. This is because most of the ground work has already been done.
Some good examples of when you should consider updating your Shareholders Agreement are:
The more complicated the company setup is, the more your chances increase of a Shareholders Dispute.
Some of the most common disputes that arise between shareholders are:
For simple Shareholders’ Agreements, you can expect to have it finalized and completed within the 3-week period.
Sometimes we are able to get it back even sooner, such as where our clients don’t ask for major revisions after
receiving the initial draft. More complex Shareholders’ Agreement (think 3+ shareholders and heavy negotiations)
could take a lot longer than our anticipated 3-week timeline. If you are expecting that your Shareholders’
Agreement may be heavily negotiated, please advise your business lawyer at the start of your engagement so that we can strategize on the best ways to avoid a long drawn out negotiation period.
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