Many entrepreneurs, who start a multi-shareholder company, often focus solely on becoming incorporated to limit their personal liability and not on how the company will be run, on an ongoing basis. This can lead to uncertainty on how to deal with disputes when they arise. A well devised Shareholder’s Agreement is one tool that can create a road map, setting out options for dealing with unexpected interactions between shareholders.
By way of background, a Shareholder’s Agreement is a contract between the shareholders of a company and the company itself, and is intended to provide a more detailed set of shareholder rights and obligations, beyond what is prescribed in a company’s Articles of Incorporation (the “Articles”) or in the Business Corporations Act (British Columbia) (the “Act”).
Provisions that should be considered in a Shareholder’s Agreement include:
- Providing existing shareholders with pre-emptive rights to purchase newly issued shares, to prevent diluting a shareholder’s control;
- Determining how the financial contributions from the shareholders, such as shareholders loans, will be managed;
- Placing restrictions on a rebellious employee shareholder (For example, by requiring an employee who does not fulfil their obligations to be removed as a shareholder);
- Placing restrictions on who can hold shares in the company and requirements for the transfer of shares from a shareholder to a third-party (For example, by providing other shareholders with a mandatory right of first refusal);
- Determining what happens in the event an existing shareholder dies (For example, by determining if the company should maintain insurance policies on existing shareholders);
- Determining the method of appointing the directors of the Company and the quorum for directors meetings;
- Determining voting requirements for major decisions;
- Determining the shareholders’ contribution in the management of the company;
- Providing dispute resolution formulas and restricting shareholders from conducting other activities similar to the company;
- Determining how the distribution of profit to the shareholders will be conducted.
There is also a benefit in placing some of these provisions within a Shareholder’s Agreement rather than the company’s Articles, as the Articles are accessible to the public, whereas a Shareholder’s Agreement is not.
Prior to incorporation of a company, a full review of the company’s intended business, and its intended shareholding, management and governance structure to determine how best to structure a Shareholder’s Agreement.
If you require assistance in drafting a Shareholder’s Agreement, please contact Paul S.O. Barbeau.