Published on February 12, 2013
Posted in: Blog
In its simplest form, a shareholder agreement is a contract between the owners of an incorporated business that sets out how the business should be run and how best to deal with issues that could become acrimonious in the future. Among other things, it can assist shareholders in identifying risks and what is important to them, establishing mechanisms for succession planning, and reducing their chances of ending up in costly litigation if challenges arise in the business relationship. When well thought out and properly drafted, a shareholder agreement will be a shareholder’s best tool for protecting its interests and financial investment.
Despite its undeniable utility, the cost of having a tailored agreement drafted often causes many shareholders to rely on a standard form template or skip the agreement all together. This is especially the case when shareholders are close friends or family members and enthusiastic about a new business venture. Whatever the situation, shareholders that cut costs on their shareholder agreement often learn the hard way that a properly drafted agreement can actually be a cost- saving measure in the long run.
As a starting point, shareholders considering a shareholder agreement should be mindful that just as no two businesses are alike, no two shareholder agreements are alike. There truly is no such thing as a simple or standard agreement. Each shareholder agreement will be unique to the corporate situation and there will be a wide range of issues that can be dealt with through a variety of mechanisms.
On a general level, a shareholder agreement should cover:
- who the directors and officers are
- how decisions are to be made
- remuneration and employment of directors, officers, and key employees
- major capital expenditures
- distribution of profits
- restriction on the transfer of shares
- capitalizing the company with shareholder loans and loans from lenders
- how to exit ownership, i.e., selling to third parties, shotgun provisions, piggy-back rights, etc.
- how to deal with future events, i.e., bankruptcy, divorce, retirement, death, disability, etc.
The above list is not exhaustive and a properly drafted agreement should address all of the above issues (and more) with reference to shareholder and business specific interests. These issues should be discussed among shareholders at the outset before the business becomes operational and while all shareholders share a concern for the business. First time entrepreneurs will be well served by engaging experienced corporate counsel to guide them through the issues that are relevant to their business plan.
Want to know more? The next installment of this blog article will discuss the importance of planning for how to exit ownership and the different exit mechanisms that can be built into your shareholder agreement.