When should a shareholders’ agreement be required?

It is recommended that a shareholders’ agreement be prepared and adopted whenever more than one shareholder has an interest or right in a corporation. Find out all that is involved in this pact between partners.

What is a shareholders’ agreement?

In Canada, it is a contract between two or more shareholders of a corporation; it may also be an agreement between one or more shareholders with a corporation. This agreement is governed by the law of incorporation that all corporations must respect, as well as the rules of common law contract law and the Civil Code of Quebec.

The main purpose of this agreement is to clearly define the duties and obligations of the shareholders towards the corporation and/or the other shareholders. Here are some examples of situations in which a pre-existing agreement makes it easier to resolve certain shareholder disputes and avoid having to resort to the courts for resolution:

  • when a shareholder dies ;
  • if one decides to sell their share of the company;
  • or if one goes bankrupt.

Why is it important to have a shareholders’ agreement?

Since the commercial reality of a company is bound to evolve (sometimes rapidly), a detailed and precise agreement allows the shareholders to maintain dynamic relations, to avoid conflicts or to settle disputes amicably.

This approach helps directors minimize risk and preserve the benefits of share ownership. It also enables flexibility in anticipating events. The parties are able to better control their relationship and make decisions together in their own way.

This agreement can also provide an effective mechanism for directors to deal with unforeseen difficulties between shareholders. It is important to remember that in the absence of a shareholder agreement, provincial or federal laws apply.

What should a shareholders’ agreement contain?

The names of the shareholders, the financial participation of each, the commitment of each shareholder towards the company must be mentioned in an agreement. The date and signature of the shareholders and that of a witness are also required.

This document can contain many rules and clarifications, but some clauses are common. For example…

  • The distribution of the responsibilities of each shareholder.
  • Salaries and dividend distribution for each shareholder.
  • The system for determining the value of shares.
  • Provisions in the event of the disability, incapacity or death of a shareholder.
  • The distribution of profits and losses.
  • Confidentiality, non-competition and non-solicitation clauses.
  • The implications of the veto.
  • The modus operandi in the event of a share or company buyout.
  • Voluntary withdrawal of a shareholder who decides to sell his shares (details of the modalities, deadline…)
  • The forced withdrawal of a shareholder who is unable to fulfill his or her role (or whose reputation negatively influences the company’s image).
  • In some cases, mention of the ultimatum clause which serves to put an end to a dispute that cannot be settled between shareholders.
  • Information on a life insurance plan for each of the shareholders.
  • Terms and conditions in case of bankruptcy, discharge, bonding.
  • Terms and conditions of financial contributions.

What is a unanimous shareholder agreement?

We are talking about a different type of shareholder agreement. A unanimous agreement allows the shareholders to restrict or even withdraw the powers held by the directors. In the event of a restriction, the shareholders have the choice to manage these powers in different ways. For example, by changing the majority rule when it comes to the adoption of a decision made by the Board of Directors; or by granting a veto right.

In the event of a withdrawal, the shareholders may assign all or part of these powers to themselves. They are therefore in a position to make decisions (by voting) concerning the affairs of the company in the exercise of this new management. A lawyer specialized in this legal field has all the know-how to ensure the drafting and follow-up of a unanimous shareholder agreement.

As important as a marriage contract or a will, the shareholders’ agreement requires a thorough knowledge of corporate law and the expertise to prepare and adapt it to the situation at hand. When properly established, this agreement helps reassure and protect shareholders, investors and employees alike.

By consulting a law firm specializing in this area of law, you can ensure that the document meets all the requirements and details. In case of conflict between partners, a lawyer can advise and guide you toward the most beneficial solution for the parties involved.

NOTE: This article does not constitute legal advice or the opinion of a commercial lawyer. It is intended only to inform readers about certain aspects of the details typically found in a shareholders’ agreement.