(Originally posted on September 5, 2016)

 

Shareholder Agreements – a MUST for Your Business

 

When more than 50% of marriages end in divorce, what would make one think that a business partnership is any different?

Many friends and family members enter into business together with the best of intentions; however, when working along side someone 8 hours per day, 5 days per week, things change…

If this type of situation arises in your business, do you have a Shareholders’ Agreement to protect yourself?

Firstly however, why an Agreement?

The Shareholders’ Agreement provides a framework to navigate within regarding the shareholder’s rights and obligations, and the protection of the interests of all the shareholders in the event of changing circumstances.

What should your Agreement Include?


The agreement should provide guidelines about how the ownership of the company will operate, including an outline of the funding of share transfers, management rights, dividend policies and details of how equity will be provided to employees (if applicable). As well as setting parameters for company operations, the overview helps guide shareholders through issues not dealt with elsewhere in the agreement.

An Agreement should be constructed in such a manner as to anticipate a number of potential future events, such events that could seriously harm or even cause the dissolution of the business.

There are a great number items to consider when creating your Agreement, however, some of the most common things to consider include:

  • Valuation of the Company: In the event the company is to be sold or additional shares / investors added, how will the value be determined? There are several valuation methods available, which one will you use?
  • Exit Strategies: Setting out formal processes that govern how shareholders can exit the business and at what price, can remove a major source of contention in private company ownership. The sale process should give existing shareholders pre-emptive rights to purchase the stake before it can be sold to an outsider using the valuation method set out in the agreement. Should the partners refuse this “first right” to buy, then the selling partner can then find a third-party buyer at the same (or higher) asking price.

What happens in the event of death or disability of one of the Shareholders?
This can be a great area of concern, family members may wish to inherit the shares then sell them, the other shareholders may want to acquire the shares but how will they pay for them? (which can be handled through various insurance products).

Similarly to the above issue, what happens in the event of a divorce? It is entirely possible for the spouse of one of the shareholders to acquire some or all of the shares in a divorce proceeding.

  • Wages and Benefits: What are the shareholders to earn for their regular efforts? Will they be paid based upon the work performed and the fair market value of that work? Will the compensation be based solely upon the earnings and performance of the business?
  • Dividends & Earnings Distributions: How and when are dividends and other earnings to be paid?

What happens when you cannot agree? If a dispute arises between the Shareholders, what should happen? Will you go to mediation? Arbitration? Court?

Other things to be considered may include:

  • Restrictions on share transfers
  • Employment of Family Members
  • Non-Competition conditions
  • Non-Solicitation issues
  • Requirements for additional capital

Remember, a shareholders’ agreement is very similar to a pre-nuptual agreement; it is there to protect everyone involved in the event that the relationship dissolve.

A Shareholder Agreement is an extremely important document and should be carefully considered and prepared by an experienced Legal Professional.

Our legal team can help! For a quote and consultation, call us at 1-855-LEDGERS or email This email address is being protected from spambots. You need JavaScript enabled to view it.