Protecting The Interests Of The Included Parties by Use of Shareholder Agreements

Starting your own business can be risky, for more reasons than you think. If you decide to incorporate your business, and there are many reasons why you should, it is important to make sure that the interests of the shareholders (SH's) are protected.

When a corporation is formed that involves two or more shareholders, those members of the corporation frequently enter into an agreement to define the business relationship between some or each of them. Such an agreement is called a "Shareholders' Agreement" (SHA). If the agreement is between all of the SH's of the corporation, the agreement is generally referred to as a "Unanimous Shareholders' Agreement".

While there are many topics in a SHA that may be addressed in the corporation's Articles of Incorporation, there are reasons where it is preferable to address those issues in a separate document. One main reason is that the Articles of Incorporation are public documents while a SHA is generally private as between the parties to that agreement.

A SHA generally operates to change, clarify or elaborate upon the rights of the parties to that agreement under statute or common law. The purpose behind entering into a Shareholders' Agreement is to manage or avoid disputes and to provide mechanisms for addressing them as they arise. When considering an SHA, there are two areas where disputes typically arise between the included parties:

 

1. The direction and management of the corporation; and
2. The means by which the included parties may exit from the corporation (and liquidate their investment.

 

The affairs of a corporation are typically managed by the board of directors. In a closely held corporation, minority shareholders may not be adequately protected by a board composed only of representatives of the majority.

SH's may want to ensure that their interests are represented and that no one shareholder or group can exert undue influence on the direction of affairs of the corporation. A SHA can be drafted to address this. Should there be a dispute among SH's, sometimes the only means of solving a dispute is for a member to exit the corporation.

Exit mechanisms and procedures are a critical part of a Shareholder Agreement. There are many forms of exit procedures which can be provided for such as buy-sell (shotgun) provisions, right of first refusal, right of first offer, a put/call, and provisions upon the death or incapacity of a shareholder.

There are several other important provisions that should be considered in an SHA and it is always advisable to seek assistance of a lawyer with experience in this area.

Mike Henley is an associate in the corporate commercial group at the Guelph Lawyers office for Miller Thomson LLP. If you are buying or selling residential or commercial property in Guelph, and need a Real Estate Lawyer in Guelph, Mike is personable to deal with, thorough, and is backed by a highly sought-after and reputable firm to help make sure that your closing goes smoothly, is error free, and is on time.