What is a Shareholders Agreement?

A shareholders agreement is a legally binding agreement between some or all of the shareholders of a corporation which sets out the rights, responsibilities, and obligations of the company shareholders. The corporation itself is also often a party to these agreements, as many provisions will apply directly to it. Shareholder agreements are not legally required, but are extremely common among private companies to address matters beyond the scope of the by-laws, articles of incorporation, and corporate statute under which a company was incorporated. Together with these documents, any existing shareholder agreements comprise the constating documents of a corporation. Shareholder agreements can supplement, but should not contradict the other constating documents.

Shareholder agreements often serve as a cost-effective way to establish a binding business structure for owners of a company to act within when dealing with matters such as governance and decision making, non-disclosure and confidentiality, share issuance and share transfers, dispute resolution, and shareholder rights such as rights of first refusal and first offer, pre-emptive rights, and drag-along rights.

Free Shareholder Agreements

Many free shareholders agreement templates can be found online, providing a basic outline that may be useful when drafting a shareholders agreement. However, these templates are not tailored to the needs and requirements of specific companies and their shareholders. They may also contain provisions that are out of date or inappropriate for use in all jurisdictions, so additional caution must be exercised when relying on these free templates as a starting point. Consultation with an experienced corporate lawyer is strongly recommended to ensure that a shareholders agreement is specifically tailored to serve the needs to interests of the parties involved.

Types of Shareholders Agreements

Shareholder agreements can take on a variety of forms and address a variety of topics to fit the requirements of a specific company and its shareholders. Some of the most common forms of shareholder agreements include unanimous shareholder agreements and general shareholder agreements.

Unanimous Shareholder Agreement

Unanimous shareholder agreements (USA’s) require unanimous shareholder approval, no matter the size of an individual shareholder’s ownership stake. This consensus requirement ensures the interests of all shareholders are protected, and is particularly useful for key decision making and governance. Unanimous shareholder agreements are notable for the fact that they are binding on parties other than the original signatories, including the corporation, directors, officers, and future shareholders, as long notice of the USA is provided on the share certificate. Unanimous shareholder agreements can restrict the authority of the board of directors by withdrawing powers that instead resides with the shareholders.

General Shareholder Agreements

General shareholder agreements do not require unanimous approval of all shareholders. They can allow for majority shareholders to operate the corporation and make business decisions without the consent of every shareholder, which can often lead to stalls in progress. General shareholder agreements can be very narrow or broad in scope, and typically address things like shareholder relationships, management of the corporation, and protection of minority shareholders.

Why Do You Need a Shareholders Agreement

Shareholder agreements are beneficial tools for the shareholders of a corporation. They outline and establish clear guidelines and expectations for shareholders regarding shareholder relationships and operations of the business. This can help to ensure the smooth operation and long-term stability of the corporation by preventing disputes and misunderstandings between business partners, and outlining dispute resolution procedures for when they do arise.

Key Components of Shareholder Agreements

Shareholder agreements can vary dramatically to protect shareholders rights and fit the legal requirements and business needs of specific corporations. No shareholder agreement is universal, but some of the most common provisions are listed as follows:

Governance and Decision Making

Shareholder agreements often have a direct impact on corporation governance by redistributing powers and liabilities between the board of directors and shareholders. They can also stipulate board nomination rights, board observer rights, and shareholder veto rights against the board. Quorum thresholds and approval thresholds necessary for the approval of key operational decisions can also be set and altered in within shareholder agreements.

Non-Disclosure and Confidentiality

Non-disclosure and confidentiality provisions within shareholder agreements can be especially important for small, privately held corporations, where the duties of directors are often taken on by shareholders. These provisions can help to protect the corporation in the event a shareholder leaves with proprietary information or internal knowledge.

Shot gun Clause

A shotgun clause, also known as a buy/sell provision, can serve as a last-resort dispute resolution method facilitating the exit of one shareholder in the event of a dispute. It allows one shareholder to make an offer to buy another’s shares at a stated price. The other shareholder then has the option to either accept and sell their shares, or to reverse the offer and buy the offering shareholder’s shares at the same price. This forces the exit of one party while allowing the other to become the sole owner of both parties’ shares.

Right of First Refusal

A right of first refusal is a provision that grants existing shareholders within a corporation with multiple shareholders the opportunity to purchase shares from a selling shareholder before they can be sold to an outside third party, typically along the same or similar terms to the third party offer. The shares can only be sold to the outside party if the existing shareholders decline this offer. A right of first refusal helps protect the interests of current shareholders by providing a means to block unwanted third parties from acquiring shares in the company.

Pre-emptive Rights

A clause granting pre-emptive rights to shareholders of a corporation grants them the right to buy a pro rata, or proportional share of any future share issuances by the corporation, based on their current ownership interest. For example, a minority shareholder with a 10% ownership stake my be granted the right to purchase 10% of any future share issuances by the corporation before these shares are offered to new investors. Pre-emptive rights protect the interests of current shareholders by preventing dilution of their ownership stakes.

Drag-Along Rights

A drag-along provision may grant majority shareholders who wish to sell their shares in a corporation to a third party the right to force minority shareholders to sell their shares as well. This ensures that the purchasing party can acquire 100% of the company, which is a common requirement of such transactions. This guarantee can ensure smoother transactions, as well as make the company more attractive to potential buyers.

Dispute Resolution and Enforcement

A key objective of many shareholder agreements is dispute resolution and prevention. Many of the aforementioned clauses and provisions commonly found in shareholder agreements can prevent disputes by protecting shareholder rights or providing means to force shareholder exits. However, many shareholder agreements also include terms mandating dispute resolution procedures such as mediation or arbitration before legal proceedings can be commenced.

Our Shareholder Agreement Services

A well-drafted shareholder agreement can be a major asset to ensuring the continued smooth operation of your business. Our team of expert corporate lawyers at Forum Law LLP possess the necessary skill and expertise to assist you in drafting a shareholders agreement that is tailored to the specific needs of your business and shareholders. At Forum Law, our corporate lawyers are also experts in litigation, and can provide reliable legal counsel through any disputes or proceedings arising from your shareholders agreement.

Hire Our Lawyer in Edmonton to Draft a Shareholder Agreement

In choosing Forum Law as your shareholder agreement lawyer in Edmonton, you are not just gaining legal representation, you are gaining a strategic partner dedicated to your business’s success.