Shareholders’ Agreements – What Are They and Why You Should Have One
If you own a business with one or more partners in British Columbia, a shareholders’ agreement is one of the most important legal documents you can have. Running a business involves making decisions, managing responsibilities, and planning for the future, but what happens when disagreements arise, a shareholder wants to leave, or unexpected events impact ownership? Without a clear framework in place, these types of situations can lead to costly disputes or even jeopardize the future of your business.
A shareholders’ agreement helps prevent these issues by establishing clear rules for governance, ownership rights, and decision-making. It acts as a roadmap that outlines how major business matters will be handled, ensuring that all shareholders understand their rights and obligations from the outset.
When Should You Create a Shareholders’ Agreement?
Ideally, a shareholders’ agreement should be created at the business’s inception when forming the company. This ensures that all shareholders start with a clear understanding of their rights, responsibilities, and the rules governing ownership. If your business has already been established, it’s a good time to put an agreement in place when new shareholders or investors come on board. This helps set expectations and prevents future conflicts. The reality is that it’s never too late to implement a shareholders’ Agreement though.
What are Some of the Common Types of Clauses in A Shareholders’ Agreement?
Below are some of the most important types of clauses to consider including in a shareholders’ agreement:
• Capital Contributions – Specifies initial and future funding obligations of shareholders.
• Right of First Refusal (ROFR) – Requires a shareholder to offer shares to existing shareholders before selling to an outsider.
• Tag-Along Rights – Protects minority shareholders by allowing them to sell their shares if a majority shareholder sells.
• Drag-Along Rights – Allows majority shareholders to force minority shareholders to sell if a buyer wants full control.
• Board Composition & Voting Rights – Defines board structure, appointment rights, and voting powers.
• Dividend Policy – Specifies how and when dividends are declared and paid.
• Profit Allocation – Defines how profits are shared among shareholders.
• Buy-Sell Provisions – Establishes procedures for a shareholder’s exit (e.g., death, bankruptcy, voluntary departure).
• Valuation Mechanism – Defines how shares are valued in case of a sale or exit.
• Dissolution Clause – Outlines what happens to assets if the company is dissolved.
• Mediation & Arbitration – Specifies dispute resolution methods before resorting to litigation.
• Deadlock Resolution – Provides mechanisms for resolving shareholder disputes (e.g., buyout provisions, Russian roulette clause).
• Confidentiality Obligations – Prevents shareholders from disclosing sensitive company information.
• Non-Compete & Non-Solicitation – Restricts shareholders from competing with the company or poaching employees/customers after exit.
How Do You Get a Shareholders’ Agreement in Place?
It’s always best to hire a lawyer to draft your shareholders’ agreement to ensure it is legally sound and tailored to your business’s needs. A well-drafted agreement can help prevent disputes and protect all parties involved. Before finalizing the document, shareholders should discuss key terms and reach a consensus on major issues such as decision-making, share transfers, and dispute resolution. Additionally, the agreement should be reviewed regularly and updated as the business evolves. Changes in ownership, company growth, or shifts in strategy may require modifications to keep the agreement relevant and effective.
Conclusion
Protecting your business and maintaining strong shareholder relationships should be a top priority. A well-structured shareholders’ Agreement helps prevent conflicts, safeguards ownership interests, and ensures the long-term stability of your company. Business owners should act sooner rather than later. Waiting until a dispute arises can be costly and disruptive. If you don’t have a shareholders’ Agreement in place or need to update an existing one, the Corporate Team at Race & Company is here to help. Contact us today to ensure your business is protected and positioned for success.
