When and Why You Need a Shareholders’ Agreement

Has anyone ever told you that as a business owner that you NEED to have a shareholders’ agreement?  Did you wonder what it was?

This article sets out some of the basics.

Why?

• Without a SA, shareholders can have difficulty resolving disagreements.
• Unlike publicly traded shares, shares of a private company are difficult to sell or transfer.
• The founder and majority shareholder usually wants to maintain a certain degree of control over who can become a shareholder.
• A minority shareholder who does not have voting control of the company, will be concerned about having a mechanism to transfer his or her shares if he or she wants to.

Who?

• If a company has one shareholder only, a SA is not required.
• If a company is incorporated with more than one shareholder or where additional shareholders are added, a SA is recommended.
• If the business is a partnership, the equivalent of a SA is a partnership agreement.
• If current shareholders are considering transferring shares, they may want to enter into a SA before the transfer is complete so as to bind these future shareholders.

What?

• A SA is an agreement between the shareholders and the company.
• The SA covers a number of issues with respect to the governance of the company and financial matters.
• The agreement usually sets out who will be the directors of the company, and which decisions need to be approved by whom and by what threshold (majority, unanimous, etc.).
• It is often useful to set out who needs to approve certain decisions, such as the payment of dividends and approval of loans.
• The shareholders should think about which decisions require which percentages of votes.  This will be very important to the founder of the company who wants to maintain control over certain types of decisions.

Where?

• You can find samples on the internet, along with many other legal forms. Use with a healthy degree of caution.
• It is important to tailor a sample SA to your particular company, and the particular needs and desires of the shareholders.
• If you have a Nova Scotia company, there are differences in the way that a SA is drafted under NS legislation versus other Canadian jurisdictions.
• A lawyer can be particularly helpful to explain the possible implications of a particular provision – such as a shot-gun clause, which may or may not be desired in your particular situation.

When?

• A SA should be put in place as soon as possible whenever there is more than one shareholder, ideally as part of the incorporation or share purchase process.
• A SA is often compared to a pre-nup or marriage contract. They should be put in place in happy times to protect the shareholders when things go awry.