Shareholders’ agreements define the way shareholders finance and operate a corporation.  They also define the rights and responsibilities of shareholders.  The best time to prepare a shareholders’ agreement is usually at incorporation, however, there really is no bad time.   Shareholders’ agreements are often viewed as an additional cost that can be put off to a later date.  This decision is usually made in the infancy of a corporation when shareholders all have a common goal and vision and before significant problems or divisions of opinion arise.

A shareholders’ agreement typically attempts to address the following issues:

Corporate Funding

There are numerous issues to consider in relation to corporate funding such as who determines whether there is a need to raise funds, how many votes are required to make such a decision, and on what terms funds are borrowed are critical questions. The Ontario Business Corporations Act (the “Act”) provides that if there is no written agreement providing guidance to the contrary, the number of votes required would be a simple majority. The Act does not, however, address issues such as whether or not shareholders that do not approve the borrowing are required to provide personal guarantees on such financing. Additionally, the Act does not provide any recourse or guidance as to what happens to a shareholder who does not or cannot provide the funding required of him or her when other shareholders contribute. Your shareholders agreement can and should consider these matters.

Establishing Directors and Officers

Shareholders appoint directors and directors appoint officers. The Act provides that such appointments are made by a simple majority. In some cases this is appropriate, however, there are many instances a minority shareholder might still expect a seat on the board of directors to monitor his or her investment and have a general say in the high level management of a corporation.  A shareholders’ agreement can assist in establishing the ground rules for all such appointments and the termination of such appointments.

Transfers or Dispositions of Shares

In the process of forming a company, shareholders do not often put their attention to the issues that arise with respect to shareholders that want out of the business. A shareholders’ agreement can set the rules for any such departure such as when a shareholder that wants to sell his or her shares or when a shareholder must leave the business because he or she becomes disabled or deceased.  Without a shareholders’ agreement in place, it is not always certain on what terms a shareholder can leave. Your shareholders’ agreement can and should address the following common issues as well as others depending on need: i) whether a shareholder can sell their interest to anyone of their choosing or whether the remaining shareholders should have the right to approve such a sale; ii) whether or not a shareholder must offer such shares to the other shareholders before accepting an outside offer;  iii) what qualifies as being “disabled” and if a shareholder becomes disabled, should the corporation, the other shareholders, or the disabled shareholder have the right to force a sale of shares and at what price; iv) if a shareholder dies, should the corporation, the other shareholders, or the deceased shareholder’s estate have the right to force a sale of shares and at what price; v) if some or all of the shareholders no longer feel they can work together, should any one of such shareholders have the right to force a mandatory purchase and sale of shares.

The foregoing represents a very high level discussion and is not applicable to all circumstances. For a detailed discussion and advice specific to your needs, please contact a member of our Business Law team.