Shareholders in Ontario know that there is no “one size fits all” shareholder agreement that can be applied to all companies. Every company has its own unique needs and concerns, which is why a customized shareholder agreement is crucial. A cookie-cutter template may actually do more harm than good, which is why every shareholder’s agreement should be custom-tailored for each company.
Key Considerations for Drafting a Shareholder’s Agreement in Ontario
Before drafting a shareholder’s agreement in Ontario, there are several key considerations that shareholders should keep in mind. These include:
Directors – How many directors will the company have? Who will be the directors of the company, and what happens if a director resigns or dies?
Quorum – How many directors need to attend a business decision-making meeting for it to be considered valid
Signing Authority – Who will be authorized to sign agreements and cheques on behalf of the company
Fundamental Company Decisions – What decisions require the consent of the shareholders or directors, and how many votes are required? Fundamental decisions include selling the business, borrowing or lending money, spending money of x dollars, giving more shares, giving dividends, borrowings in excess of certain amounts etc.
Time Contributions – Will each shareholder contribute their time to the business equally, or will additional compensation be given for disproportionate contributions?
Money Contributions – Will shareholders be required to make initial loans or advances to the company for start-up capital?
Bank Financing or Shareholder Cash Call – Will the company first seek financing from a bank or private lender, or can it request money from shareholders? What are the terms of borrowing from shareholders? What if one shareholder is able to contribute more than another shareholder
Restrictions – Can shareholders engage in a business that competes with the company? Will confidential information and trade secrets be protected from being shared? Can there be a solicitation of former clients or employees after a shareholder sells all his ownership?
Right of First Refusal – Will a selling shareholder be required to offer their shares to other shareholders first
Majority Drag Along Rights – Can majority shareholders force other shareholders to sell their shares if a buyer is found who is willing to buy all shares in the company? This prevents the minority shareholder from blocking the sale of the entire company.
Minority Tag Along Rights – Can minority shareholders force a buyer of majority shares to also buy their shares? This allows the minority shareholder the ability to sell their shares when the majority shareholder finds a buyer who is willing to buy their shares in the company, so the minority shareholder isn’t left behind in the dust with a stranger shareholder.
Shot-Gun Clause – Can a shareholder make a compulsory offer to another shareholder to sell all their shares or buy the shares of the other shareholder? This is the ultimate deadlock breaker, kind of like Russian roulette.
Death – What happens to a shareholder’s shares if they die? Do their shares get bought by the company, or do other shareholders have the option to buy
Default – What happens if there’s a default under the shareholder’s agreement?
Valuation of Shares – How will the shares be valued in a sale? By agreement at the time of sale, by retaining a certified business valuator, or a chartered accountant
Distribution of Profits – How will dividends be distributed among shareholders? Will the company pay salaries? Paid in accordance with a pre-determined formula or fixed % to be paid out?
In conclusion, a customized shareholder’s agreement is crucial for every company in Ontario. By considering the key factors outlined above, shareholders can ensure that their agreement is tailored to the specific needs and concerns of their company. If needed, contact a corporate lawyer to make sure your business is protected.