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brandon@amentlegal.com

SHAREHOLDER AGREEMENTS

All corporations start out with good will towards your business partners. As your business grows and challenges present themselves, your business needs to be able to handle disagreements between the management team and among shareholders. If a dispute between shareholders has animosity and the potential for litigation, the costs for the corporation can be substantial.

A well drafted shareholder agreement, by a Toronto business lawyer, is vital to the long term health of the corporation.

1.    Restrictions on Share Transfers

• Without a shareholder agreement which contains clauses related to the sale of shares, any shareholder would be able to sell his shares to a third party subject only to the transfer requirements stipulated in the articles of incorporation.
• Shareholder agreements can include a right of first refusal clause to protect against unwanted third parties purchasing shares in the corporation. Under this clause, the current shareholder has the opportunity to match any third party offer made to a current shareholder.
• Minority shareholders  can be protected if the majority shareholders are selling their shares to a third party and have excluded the minority shareholder. The minority shareholders can exercise a piggyback clause which enables them to sell their shares to the third party purchaser on the same terms as the majority shareholder. 
• Shareholder agreements can have provisions in place in case of death, bankruptcy, divorce, or disability of a shareholder. Most shareholders do not want their business partner's estate, spouse, creditors or trustees to become a shareholder of the corporation. Shareholder agreements include provisions enabling the corporation to buy back a shareholder's shares if one of the above events occur.
• A valuation clause enables the shareholder's to agree on a fair market value of the shares or have a mutually agreed on expert conduct a business valuation.

2.    Shotgun Clause

• ​A shotgun clause permits any shareholder to offer to purchase the other shareholder's shares. If the offer to purchase the shares is declined, the other shareholder must purchase the offeror's shares. The shotgun clause is the utmost remedy to cure shareholder disputes and has the potential to be abused and unfair in situations where there is financial inequality between shareholders.
  

3.   Management

• The shareholder's can decide that they want specific shareholder's to have the right to appoint one or more directors of the corporation to represent their interests. Shareholder agreements can include a clause that specifies that major decisions of the company require a majority, high percentage or unanimous vote in order to proceed.
• Shareholder agreements can include a clause dealing with the sum and timing of a dividend distribution to the shareholders. If the distribution of the dividend is not mentioned in a shareholder agreement, it is in the discretion of the directors of the corporation.
• The shareholder's can manage who controls the corporation, place restrictions on directors and give the shareholder's rights that they would not otherwise have. 

4.   Dispute Resolution

• A shareholder agreement can provide the framework for dealing with a dispute. Shareholder agreements commonly include mediation and arbitration clauses. This clause enables any dispute to be settled in a much more cost efficient manner than litigation.

Mr. Ament, Toronto business lawyer, understands that every shareholder agreement is unique to the corporation's facts and is customized to fit your business requirements. When a shareholder agreement is negotiated between the parties and executed it becomes a contractually binding document between the corporation and its shareholders. The shareholder agreement will provide a framework for the governance of the corporation and structure for any dispute resolution. It is easier and more cost effective to negotiate the provisions of a shareholder agreement prior to an actual dispute arising.