Shareholder Agreements Ontario

Shareholder Agreements Ontario

Prevent conflict, ensure your business runs smoothly, and set rules for orderly share transfers with a solid, legally binding shareholders’ agreement.

A shareholder agreement is a formal pact between shareholders of a corporation. The document establishes the rules on how the business will be run and what the shareholders’ duties, responsibilities, and rights will be. 

Once assented to by all the parties involved, the agreement becomes a legal document. Though it is not a legal requirement to have one, a shareholder agreement is essential to have in place as it protects shareholder interests and limits the potential for conflict.

A well-crafted shareholder agreement is a product of wide consultation between shareholders, which unites them around a common goal and vision for the business. 

When presented to potential partners and financiers, some of whom may request it, a shareholders’ agreement can help paint the image of stability and strength.

What does a shareholder agreement cover?

Starting a business as partners without a clear, watertight shareholders’ agreement sets a weak foundation for the company, as does a vague agreement that skirts around critical matters.

In theory, the idea of two more people coming together to start a business is an appealing one. The more shareholders there is the more capital you can pool together. There is also the potential for more, better quality ideas, expertise, and talent that can advance the business.

But the more shareholders there are, the greater the potential for conflict. However motivated you may all be to work for the success of the business, you will not always agree on the best path to follow. A shareholder agreement sets rules on how to proceed in every scenario.

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    Company management and general governance

    Businesses ultimately fail and succeed on the competence of the management team. For a corporation, the board of directors is responsible for the day-to-day running of the business. A shareholders’ agreement spells out clearly what rights majority and minority shareholders have in board appointments.

    For conflict-free decision making, the shareholder agreement lays the law on meeting quorums, approval thresholds, and shareholder veto rights. 

    If the agreement takes the form of a universal shareholders agreement (USA), it will articulate what responsibilities and powers shareholders are taking away from the directors and what the associated liabilities will be.

    Share transfers

    Each individual shareholder is ultimately guided by self-interest, thus there may be conflict on what happens when one shareholder decides to dispose of their shares. An agreement will address this eventuality before it happens. 

    A good shareholder agreement will balance the interests of the company with those of individual shareholders. It guides share transfer, typically by giving the other shareholders the first right of refusal in the event one decides to sell their shares. Similarly, the shareholder agreement may empower the corporation to buy back shares of a deceased or insolvent shareholder. 

    In cases where a spouse gains a share of the company through a division of property in a divorce, instead of allowing an unwanted party to come in as a shareholder, the agreement may force the affected shareholder to sell back their shares to the company. 

    In all share transfer circumstances, the shareholders’ agreement will also set provisions on how the shares will be valuated.

    Non-compete clauses

    At some point, a shareholder may decide to sell their shares and strike out on their own. It happens and a good shareholder agreement will anticipate the event and provide for how it will be addressed.

    Because of the knowledge they have on the workings of the company, its products and its strategic secrets, the departing shareholder will be prevented from starting or working for a business that directly competes with the company. A non-compete clause binds them to this obligation.

    In general, a shareholder agreement protects the corporation from the hurtful acts of former shareholders.

    Shareholder agreements establish a measure of flexibility in the management of the business, ensuring that it is not held back by shareholder conflict. If you don’t have one in place, the corporate law experts at De Sa & Associates would like to help you draft one.

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