Shareholders’ Agreement

One of the biggest reasons for having a shareholders’ agreement in place is to ensure that things go according to plan upon the occurrence of various “what if” situations that might arise over the lifespan of your business. Death, incapacity, and exit plans are all things that will have a significant impact on the shareholders and the business itself, and the default rules for governing these situations might not be ideal.

For instance, upon the death of a shareholder, their shares would normally fall into the hands of the deceased shareholder’s estate. This could mean that the business and surviving shareholders would need to “be in business” with the estate, something that all of the parties might not have anticipated or desired when they initially invested in the business and something that would introduce great complexity into the continued operations of the business.

Shareholders’ agreements can also streamline business decisions by introducing dispute resolution mechanisms to keep conflicts from slowing business down or bringing it to a halt. Without these mechanisms, the Company might not be able to pass necessary resolutions and proceed with significant business matters, creating the potential for lost business opportunity, lost profits, and a loss of goodwill between the partners.

A shareholder’s agreement should clearly outline the rights and responsibilities of each shareholder of the business along with any rights and responsibilities of the business itself. It’s often prudent to set out how much of the business each shareholder owns, and what requirements must be met in order for a shareholder to sell their interest in the business.

The agreement can also contain restrictive covenants such as non-competition and non-solicitation agreements that the shareholders’ are bound to while they remain in the business (and, potentially, for a period of time after selling their interest).

Finally, the agreement might cover terms for dispute resolution, how decisions are made such as hiring, firing, issuing and taking on debt, and much more. The contents and comprehensiveness of a shareholders’ agreement should be tailored to the unique needs of each business. Seek professional legal advice to ensure your shareholder’s agreement is catered to your needs and to minimize the possibility of future surprises.

As soon as you start contemplating preparing a shareholders’ agreement, we advise scheduling a consultation with us. Engaging legal counsel in the process will ensure that you are asking the right questions when it comes to the rights, responsibilities, and risks that should be addressed in your shareholders’ agreement. We can also help simplify the process by advising on common practices and mechanisms to place within your shareholders' agreement.

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