When a privately held company has more than one shareholder, it is strongly recommended that the shareholders enter into a shareholders’ agreement, or at least consider it with consultation from your lawyer.
Shareholders have a great degree of freedom when drafting and entering into a shareholders’ agreement, so long as the agreement is consistent with the law. Each group of shareholders will have unique priorities and concerns when considering their agreement, but a few basic terms often contemplated in a shareholders’ agreement are:
1) Dispute resolution: A good idea for shareholders is to determine if they will utilize certain dispute resolution mechanisms in the event of future disagreements such as mediation or arbitration; or if an agreement cannot be reached, the “shotgun clause” and the terms for carrying out such a clause.
2) Which matters require a unanimous vote: Shareholders can agree at the onset that some matters require a unanimous vote for if, and when, certain matter arise. For example, for closely held companies it is common to require a unanimous vote on loan agreements or the election of directors.
3) Clauses to protect minority shareholders: In order to protect the interest of minority shareholders, common protections included are a “tag-along” right, and the “drag along-right”. A “tag-along” right, permits a minority shareholder to participate in a sale of shares by a majority shareholder to an outside party and participate in the sale. A “drag-along” right on the other hand allows a majority shareholder to force a minority shareholder to participate in the sale to a third party as to not prevent the sale occurring. While there are legislative provisions around these rights, a shareholders’ agreement can allow for the parties to understand and clearly define these rights.
4) Provisions around the transfer of shares: Typically, the current shareholders will want to include an agreement about who can transfer shares, and who may become a new shareholder in the company. This is especially true for companies with few shareholders. Therefore, often in a shareholders’ agreement the parties will include a right of first refusal that allows for current shareholders to purchase any shares that may be available. Further, provisions may address what happens to shares upon the death of a shareholder.
The above are only a few of the terms that shareholders may use to facilitate a clear solution should future problems arise. Having an agreement in place can give the parties certainty to focus on the goals of their company and offer a fair, predetermined problem-solving mechanism.
If you are a business owner and have more than one shareholder in your company, we would be pleased to discuss your particular situation and discuss the benefits of having a shareholders’ agreement in your circumstances. Please contact our office if you would like assistance.
Author: Bennett Liddycoat
This information is general in nature only. You should consult a lawyer before acting on any of this information. This information should not be considered as legal advice. To learn more about your legal needs, please contact our office at (250)448-2637 or any of our lawyers practicing in the area of business law at the following:
Una Kuzio: firstname.lastname@example.org
Bennett Liddycoat: email@example.com