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Sukhi Hansra October 12, 2026
A shareholder agreement, also called a shareholders’ agreement or a shareholder contract, is a written contract between the owners of a corporation. It sets out how the company is run and how decisions are made. It also covers what happens when an owner wants to leave or passes away, and how disputes between the owners get resolved.
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.
Suppose you build a company with your best friend. The two of you split the shares down the middle, the business takes off, and for years the money is good enough that nobody ever gets around to writing down the rules, because writing down rules feels unnecessary between people who trust each other completely.
Then one month your bookkeeper flags something strange. Your partner has been taking extra money out of the company, and the withdrawals go back further than you want to believe. When you confront your partner, the conversation you expected to fix everything turns into the worst fight of your life. Word of the dispute reaches your bank, and the bank does what banks commonly do when the owners of an account are at war with each other. The bank closes the account and waits for the owners to sort themselves out, which means the company’s own money is now locked away from both of you.
Now walk through what the next Friday looks like. Payroll is due and the account that pays it is frozen, so you cover your employees’ wages from your personal savings. Supplier payments start bouncing, and every bounced payment costs a little more of the reputation you spent years building. And here is the detail that makes the situation genuinely unfair. Your partner has been sitting on the money he took, so he walks into this fight with a war chest, and the better-funded side hires the stronger lawyers. The person who did nothing wrong is the person fighting uphill, against someone who used to be his best friend, with his own company’s bank account sealed shut.
This scenario is actually something we have seen before. We acted in exactly this situation for the partner who had taken nothing, and correcting it cost him tens of thousands of dollars. A proper company structure, a complete minute book, real by-laws, and a well-drafted shareholders agreement would have cost roughly a quarter of that amount, and the agreement’s dispute and exit clauses would have resolved the money question long before any bank ever froze an account.
The lesson is one we repeat to every new multi-owner corporation. Owners skip the shareholders agreement at the start because everyone is on good terms, and it feels like any problem can be solved while everyone is happy. However, when a dispute breaks out, you are no longer on happy terms, and the agreement you write now, while you still agree, is the only version that gets written cheaply and fairly.
If you are starting a company with a co-founder or bringing in an investor, the time to write down the rules is now. The same is true if you already have partners and never wrote anything down. A shareholders agreement lawyer’s job is to turn what you have agreed verbally into terms that still work when you no longer agree. We draft shareholder agreements for corporations in Toronto and across Ontario. The work ranges from two-owner small businesses to companies with several classes of shares and outside investors. We also act for individual shareholders who have been handed an agreement to sign and want to know what it actually does to them.
For a small business with two or three owners, the shareholder agreement often matters more than it does for a large company. Each owner is usually also a director and an employee, and sometimes a personal guarantor of the company’s debts. A falling-out between owners affects all of those roles at once. A large part of the work happens in the conversations before drafting. The agreement is only as good as the decisions the owners make together about deadlock, exits, and money.
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.
Contact us by clicking here or give a call at (416) 580-0345 and we would be happy to assist you.
The cost of a shareholder agreement depends mostly on how many owners are involved and how many classes of shares the company has. It also depends on how much negotiation the owners need between themselves. Every shareholder agreement starts with a written quote, and the tasks that could increase the fee are named in advance under our no surprise billing policy. In the dispute described above, correcting the situation cost our client tens of thousands of dollars. A proper company structure and shareholders agreement would have cost roughly a quarter of that. Learn how our fees work.
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.
Reviewed by Sukhi Hansra, Business and Franchise Lawyer at Hansra Law.
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