Articles & Resources
Why Your Shareholders Agreement Needs To Be Unique
There is no “one size fits all” shareholders agreement which will apply to all situations. Each shareholder has their own needs and concerns, so every shareholders agreement needs to be a custom tailored.
I have outlined below some of the common matters shareholders should consider before drafting a shareholders agreement.
Directors – How many directors will the company have? Who will they be (a shareholder or a director that has been nominated by a shareholder)? What happens when a director resigns or dies?
Quorum – How many directors need to attend the business decision-making meetings for it to be a considered a valid meeting?
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 the directors, and how many votes are required? Some decisions considered fundamental are 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? If not, will additional compensation be given to disproportionate contributions?
Money Contributions – Will the shareholders be required to make any initial loans or advances to the company to have some start up capital to work with?
Bank Financing or Shareholder Cash Call – Where the company requires additional funds or working capital, will the company be required to first seek financing from an institution like a bank or private lender, or can it request money from the shareholders? On what terms will the company borrow from the shareholders? What if one shareholder is able to contribute more than another shareholder?
Restrictions – Can shareholders engage in a business in competition with the company? Will confidential information trade secrets of the company known by the shareholders be protected from being shared? Can there be solicitation of former clients or employees after a shareholder sells all his ownership?
Right of First Refusal – Will a selling shareholder be first required to offer its shares to the other shareholders of the company?
Majority Drag Along rights – Will majority shareholders have the option to force the other shareholders to sell their shares if the majority shareholder finds a buyer who is willing to buy all of the shares in the company? This prevents the minority shareholder from blocking the sale of the entire company.
Minority Tag Along Rights – Will minority shareholders be able to force a buyer of the majority shareholders’ shares to also buy their shares? This allows the minority shareholder the ability to sell its shares when majority shareholder finds a buyer who is willing to buy its of the shares in the company, so the minority shareholder isn’t left behind in the dust with a stranger shareholder.
Shot-Gun Clause – Can shareholder A make a compulsory offer to shareholder B to either sell all of their shares to A or for A to buy the shares of B? This is the ultimate deadlock breaker, kind of like Russian roulette.
Death – Where a shareholder dies, does his shares get bought by the company, or do the other shareholders have an option to buy?
Default – If there’s a default under the shareholders agreement (e.g. bankruptcy, insolvency, incapacity, marital breakdown, breach of the agreement, retirement, change of control of corporate shareholder) what happens?
Valuation of Shares - How will the shares be valued in a sale? by agreement at 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?
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