Shareholder agreements help keep business relationships strong, even during challenging times. They clarify what happens if a shareholder wants to exit or if there is a dispute. With legal advice, shareholder agreements can help prevent costly disputes and complications.
In this article, we will discuss what shareholder agreements are, how to create one, and why legal advice is important. If we miss anything, you can always contact a corporate commercial lawyer from your province.
What is a shareholder agreement?
Shareholder agreements are written contracts signed by shareholders of a private company. These legally binding documents set out rules for how shareholders will run the company and work together.
Shareholder agreements in Canada can set out:
- each owner's rights, duties, and responsibilities
- what to do if an owner wants to exit or transfer their shares
- the steps to resolve disputes among owners
Shareholder agreements are not required by Canadian law, such as the Canada Business Corporations Act (CBCA) or other provincial corporate laws. However, these agreements help protect the interests of all parties, prevent problems down the road, and keep businesses running smoothly.
Watch this video to learn more about shareholder agreements:
To be guided on how to create a shareholder agreement, reach out to the best corporate commercial lawyers in Canada as ranked by Lexpert.
Why are shareholder agreements important?
While creating a shareholder agreement is at the shareholders' discretion, it is highly recommended for businesses of any size. A corporate lawyer assist with drafting the agreement.
Here are some of the advantages of having shareholder agreements:
- prevents future disputes: helps owners proactively address issues before they arise
- addresses disputes: sets rules for resolving disagreements between owners
- protects everyone's interests: helps ensure both majority and minority shareholders' interests are protected
- reflects corporate changes: reflects corporate changes: updates rights and obligations when new investors or partners join the company
- easier to update: modifying the agreement is simpler than amending the corporate articles, allowing the corporation to adapt quickly
- guides business closure: provides direction for winding up and dissolution beyond what is set out in law
- mergers and acquisitions (M&A): clarifies procedures and stakeholder rights during M&A activity
These are just some of the advantages of a shareholder agreement. To know more, business owners can always consult a corporate lawyer in Canada.
What needs to be in a shareholder agreement?
As long as it does not contravene the CBCA or any other federal or provincial law, shareholders can address most business matters in the agreement. In addition to the CBCA, businesses in Ontario should consider the Ontario Business Corporations Act (OBCA).
To maximize the use of a shareholder agreement, it can contain provisions on the following:
- voting requirements
- transfers of shares
- dispute resolution
- confidentiality and non-compete
We'll briefly discuss these areas below. Note that these are general recommendations. Consult your corporate commercial lawyer for advice tailored to your company's needs.
As a starter, here's a video that also explains what needs to be included in a shareholder agreement:
Check our directory of the Lexpert-ranked best law firms for corporate commercial law in Canada if you need help with your company's shareholder agreement.
Corporate governance
Shareholder agreements can set the rules for how companies are managed by their shareholders. Some usual provisions are:
- who gets a seat on the board
- how the board of directors are chosen
- how corporate meetings are run
- how corporate obligations will be divided
Voting requirements
The rules on voting and how voting rights work are specified in the CBCA and other Canadian corporate laws. However, a shareholder agreement can take matters further than what is provided by law.
For instance, the CBCA provides that a certain issue be addressed through a special resolution (where at least two-thirds of the shareholders should agree). The shareholder agreement, however, can require a unanimous vote instead.
Transfers of shares
A company's share ownership can change over time, resulting in transfers of shares, such as:
- a shareholder's death or disability (especially permanent)
- if a shareholder leaves the company and sells or assigns their shares to others
While shareholders have the right to sell, transfer, or assign their shares, the agreement can impose restrictions on these actions and on the issuance of new shares.
Drag-along and tag-along rights
Examples of restrictions include drag-along and tag-along rights, which are valid under Canadian law.
- Drag-along rights: Let the majority require the minority to join in the sale of the company
- Tag-along rights: Let the minority participate in the sale of the company and sell their shares on the same terms
Right of first refusal or offer
Another restriction that can be included in a shareholder agreement is the right of first refusal or offer. These are contractual rights that are not automatically granted to shareholders. As such, they must be included in the shareholder agreement if it is granted to them.
- Right of first refusal: If a third party offers to buy a shareholder's shares, the shareholder must first offer them to the other shareholders or the corporation on the same terms
- Right to first offer: When a shareholder wants to sell or transfer shares, they must first offer them to the other shareholders or the corporation before seeking outside buyers
Dispute resolution
To save time and costs, a shareholder agreement can require that alternative dispute resolution methods be used before going to court. Often, it will require that disagreements are handled first using alternative dispute resolution, like:
- negotiations
- mediation
- arbitration
Confidentiality and non-compete
Shareholder agreements may include confidentiality and non-compete clauses, as shareholders often have access to sensitive information.
What are the roles of lawyers regarding shareholder agreements?
Drafting, reviewing, and approving shareholder agreements can be complex, but corporate commercial lawyers are experienced in these matters. Here are the matters that your lawyer can help you with when it comes to your company's shareholder agreement:
- what to include in the agreement: engaging lawyers early can save time and effort, as they help draft an agreement that meets the needs of the business
- explain the agreement: lawyers can clarify the agreement's terms to ensure all shareholders understand their rights and obligations
- comply with Canadian laws: lawyers can check that the agreement complies with Canadian laws and does not conflict with the company's articles or other legal requirements
- guide shareholders in disputes: if there's a disagreement or a shareholder wants to leave, lawyers can use the agreement to resolve issues and protect interests
- updating the agreement: as the company grows and more shareholders join, lawyers can assist in updating the agreement to reflect current needs
Shareholder agreements: Strong agreements, stronger businesses
Shareholder agreements help Canadian business partners work together, even during hard times. They set clear rules for the company, so all owners know what to expect and how to deal with challenges.
Getting legal advice early makes the process smoother and helps ensure the agreement is effective. A corporate commercial lawyer can assist in creating an agreement that supports the business's long-term stability.
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