Why Do I Need A Shareholder Agreement?

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A shareholder agreement in its simplest form defines the relationship, rights (voting and otherwise) and obligations that will exist between the shareholders of the corporation and the corporation. Without a shareholder agreement, the relationship between the shareholders will be defined by applicable provincial or federal legislation.

 

Defining the rights and intention of the shareholders in writing is a very good way to not only have an agreement on various governing items but to ensure that the shareholders are of the same understanding of their relationship, rights and obligations as a shareholder. Where an agreement is not present to capture such items, there is the possibility of misunderstanding among the parties. This may lead to potential disputes among shareholders and possible litigation.

 

Often family run businesses believe that there may not be a need to have a written agreement in place. However, like any group of individuals working for a common purpose, it is always recommended that an agreement be put in place. This basic premise should not change whether the agreement exists among family members or arm’s length parties. Disputes arise in both contexts and it’s always better to have a written agreement to refer back to in times of conflict than to have nothing at all.

 

The description below captures for the most part the most common types of shareholders’ agreements.

 

1. A written agreement between two or more shareholders dealing with the exercise of voting rights attributable to the shares held by each of them.

 

2. A written unanimous shareholder agreement (often referred to by the acronym “USA”) between all of the shareholders of the a corporation which may govern not only their exercise of voting rights attributable to the shares owned by each of them, but also the management of the business and affairs of the corporation by its directors whose powers may be restricted in whole or in part by the agreement.

 

For life insurance planning purposes, a shareholders’ agreements is very important to define what will happen with the deceased shareholder’s shares on death. An agreement not only will set out what will happen with the shares but a well thought out and planned agreement can contemplate tax strategies that can benefit the deceased shareholder and the surviving shareholders. Without such an agreement all parties may be left in a less tax advantageous position as well as lacking an effective plan to determine the transfer of shares at death.

 

Shareholder agreements should also contemplate disability provisions. For instance, what will happen if the shareholder becomes disabled? What happens if the shareholder is able to return to work after the disability? When a disability policy exists it provides funding which again reduces potential conflicts amongst shareholders.

 

From a very practical perspective, a well planned shareholder agreement can provide certainty and comfort to the shareholders. This helps deter the potential for litigation and provides a better medium to work through in terms of resolving disputes via dispute resolution mechanism often found within an agreement. Most agreements would also contain provisions to allow for amendments to the agreement should circumstances change.

 

Shareholder agreements should be drafted carefully and each shareholder should receive independent legal advice before signing the agreement so that they understand their respective rights under the agreement.

 

For a more in-depth discussion relating to buy-sell provisions and the various methods, you should involve your accountant, lawyer and financial advisor.

 

Bill McElroy, BA, CFP, CIM

Published in Business Link Media Newspaper. Volume 08/ Issue 06/ August 2013