Protecting your business interest starts with a well drafted shareholders agreement
Roberts & Obradovic Law has a team of experienced lawyers to help you draft, review, and negotiate Shareholders’ Agreements in Ontario. Our law firm provide clients with valuable legal advice in the preparation, execution, and the enforcement of Shareholders’ Agreements in Ontario. Our team of knowledgeable Corporate Lawyers serve businesses of all sizes, including start-ups, small to mid-size businesses, and large corporations, in relations to shareholder agreements.
What is a Shareholder Agreements?
In general, the rights and responsibilities amongst the shareholders and the corporation are governed by corporate statute, articles of incorporation and company by-laws. Shareholder agreements are private contracts among all or some of the shareholders of a corporation that supplement, and often go beyond these organizational documents. Shareholder agreements set out the rights and obligations among some or all of the shareholders on a number of matters, including management of the corporation, equity ownership, registration rights, voting, buying and selling of shares, share transfer and confidentiality agreements. Together with the organizational or constating documents, and applicable corporate legislation, shareholder agreements provide a comprehensive framework for the management, operation and governance of a company.
A Unanimous Shareholder Agreement is a special type of shareholder agreement between all the shareholder of a corporation, or among all the shareholders and the corporation or persons who are not shareholders, that restricts the powers of directors to manage or supervise the management of the business and affairs of the corporation. Under the Canada Business Corporations Act, a unanimous shareholder agreement must be in writing.
It is important to differentiate the Shareholders’ Agreement from the Articles of Incorporation. The Shareholders Agreement is a contract among the shareholders of a corporation, while the Articles of Incorporation is a document issued by the government that legally creates the newly formed corporation as a registered business entity within Canada.
Pros and Cons of Entering into Shareholders’ Agreements
The advantages and disadvantages of entering into Shareholders’ Agreements are as follows:
- Provides a clear-cut set of rules on how to internally manage the corporation
- Provides an opportunity for the shareholders to manage the corporation even if they do not possess board seats or officer positions
- Provides a mechanism to resolve shareholder disputes
- A poorly drafted Shareholder Agreement may give rise to more issues in the long run, especially if the terms of the Shareholder Agreement are inconsistent with the Articles of Incorporation and the By-Laws
- Costs associated with the preparation of a well drafted Shareholder Agreement
Creating a carefully crafted shareholder agreement can prevent disagreements in the future, both within the group of shareholders and between the shareholders and the company itself. A poorly drafted shareholder agreement, on the other hand, may result in more risks and liabilities than benefits. Therefore, it is important to consult with an experienced business lawyer in Ontario before drafting or executing a shareholder agreement.
An experienced business lawyer will consider the long-term plans and goals of the company, the applicable corporate laws and constating documents of the corporation, the rights and protections of majority and minority shareholders, and the role of the board of directors and management. The lawyer will then draft the most appropriate form of shareholder agreement that is legally sound and offers the most benefits for their client, while accounting for the business, cost, timing and legal considerations.
Typical Components Found in Shareholder Agreements
Some commonly-used provisions of a Shareholder Agreement are detailed below:
- Preamble – dates and defines the agreement, and identifies the shareholders of the corporation.
- Governance – details the governance of the corporation, including how the Board of Directors is elected, the power to elect directors by specific types of shareholders, how Director vacancies are filled, rights to elect members of the committees of the Board, etc.
- Shareholder Approvals – sets out the protections given to shareholders, beyond the minimum levels of protection afforded by law, and the corporate actions requiring shareholder approval (e.g. when issuing or selling shares, entering into significant contracts, borrowing money, etc.). May include Minority Protection Clause.
- Minority Protection Clause—terms and conditions which require a unanimous vote or a higher vote percentage for certain corporate decisions. This usually involve major corporation decisions such as increase in capital stock, issuance of corporate bonds, or changes in the composition of the board of directors.
- Voting Agreements – agreement between two or more shareholders on voting rights, such as the right to pool votes.
- Share Transfers – sets out the rules and restrictions for the transfer of shares, including clauses such as Right of First Offer, Right of First Refusal, Tag-Along Clause, Drag-Along Rights, Buy-Sell clauses, etc.
- Right of First Refusal Clause—requires the shareholders who desire to sell their interest in the corporation to first offer their shares for purchase to the rest of the existing shareholders, before offering them for sale to third parties.
- Tag-along Rights – allows minority shareholders to sell their interest in the corporation under the same terms as that of majority shareholders, at the minority shareholders’ option.
- Drag-along Rights —forces the minority shareholders to sell their interest in the corporation under the same terms as that of the majority shareholders, at the majority shareholders’ option.
- Buy-Sell Provisions – sets out the conditions under which the shareholders are required to buy or sell shares of the corporation, for example in the event of death or bankruptcy of one of the shareholders.
- Pre-Emptive Rights – sets out situations in which the existing shareholders of the corporation have the first option to purchase newly issued shares before they are offered to others.
- Non-Compete Clause—a prohibition on shareholders from owning, possessing interest, or engaging in a business competitive to the corporation.
- Dispute Clause—sets out how disputes on matters requiring shareholder approval will be resolved, such as by alternative dispute resolution.
- Termination Clause— sets out specific instances for terminating the shareholder agreement, either in its entirety or with respect to a particular shareholder.
Shareholders’ Disputes Prevention
Disputes happen when the terms of the Shareholders’ Agreement are not observed or complied with by the shareholders and officers of the corporation.
As a result, there are times when oppression remedy actions or derivative actions are filed involving the corporation. Oppression remedy actions and derivative actions are differentiated as follows:
If a disagreement arises among shareholders, it is recommended to hire an business lawyer who specializes in shareholder disputes. This will ensure that shareholders receive professional guidance and counsel to safeguard their interests, defend their rights, and prevent any potential liabilities.
Get in Touch with Lawyers Specializing in Shareholder Agreements
If you require assistance with drafting a shareholder agreement or reviewing an existing one, reach out to our team of seasoned business lawyers at Roberts & Obaradovic Law. Our legal experts can guide you through the terms and conditions of your current agreement or assist in creating a new one for your business or organization. Get in touch with us today to schedule a consultation without any obligation. You can complete an online form or call us at (647) 724-5179 today.