Shareholders Agreement

What is a Shareholders Agreement?

A Shareholders Agreement is a document between the shareholders of a corporation. These agreements lay out the expectations of the shareholders and their obligations. The shareholders establish the rules and the set up for the major players in the corporation.

This Agreement addresses not only potential shareholder issues, but also the day-to-day activities of the corporation.

Is it mandatory to have a Shareholders Agreement?

No. Having a Shareholders Agreement is not mandatory, but it is a very useful tool. Shareholder Agreements are very vital documents for a corporation. They dictate the rules of the game, such as shareholders' rights to sell their shares, the rights concerning divorces, estate planning matters, and more. Shareholder Agreements are used for large or small corporations.

If there's a dispute among shareholders and they don't have a shareholders agreement, a shareholder will need to go to court and have a judge decide the matter.

For example, if there's a shareholder dispute and one shareholder no longer wants to part of the corporation, they can't force another shareholder to buy their shares without a valid shareholders agreement in place.

What should a Shareholders Agreement contain?

A Shareholders Agreement outlines the basic responsibilities of the corporation, including when the corporation should submit a budget, when its directors should meet and how decisions may be taken by the directors. A Shareholders Agreement may also contain:

• Limits on share transfers: this could, for example, include a right of first refusal. This means that before a shareholder can sell their shares to a third party, they must offer their shares to existing shareholders first.
• Shotgun clause: this is a common clause in a shareholders agreement. This provides an exit strategy for a shareholder who wants to leave the corporation by forcing another shareholder to buy their shares or to buy the other shareholder's shares.
• Giving existing shareholders preemptive rights: this occurs if the corporation issues new shares. It allows an existing shareholder to buy the new shares first before non-shareholders.
• Limiting exposure during a shareholder's divorce proceedings: this clause protects existing shareholders from another shareholder's divorce proceedings by forcing such shareholders to sell their shares to avoid having a shareholder's spouse own half of the shares.
• Dispute resolution mechanisms: shareholders may agree to resolve disputes by arbitration or otherwise.
• Events of insolvency or death of a shareholder: the agreement can cover events of disability, insolvency, or death of a shareholder by requiring a sale of the shares.

What are the prerequisites of a Shareholders Agreement?

To be able to enter into a Shareholders Agreement, the people agreeing must be shareholders in the corporation. This means that after the corporation was established, the corporation issued shares to the shareholder signing the agreement. Proof of share ownership usually takes the form of a share certificate or a notice sent by the corporation if the corporation doesn't issue share certificates.

Who can enter into a Shareholders Agreement?

Only the shareholders of a corporation can enter into and sign a Shareholders Agreement. The individual signing must also be of majority age. The shareholders signing the agreement may be:

• Individuals: a group of individual shareholders may sign the agreement.
• Corporations: corporations can become shareholders in another corporation and sign a shareholders agreement. A shareholders agreement can also be mixed with individuals and corporations as the signatories.
• Trusts: a trust can become a shareholder and a party to a shareholders agreement.
• Other: other entities may become shareholders, including associations.

Who cannot enter into a Shareholders Agreement?

Those who are not shareholders in the corporation cannot enter into a Shareholders Agreement. Also, if an individual is under the age of majority or under disability, they cannot legally contract, and therefore, they can't enter into a Shareholders Agreement. Furthermore, entities that are bankrupt or insolvent may not be able to contract.

What is the duration of a Shareholders Agreement?

A shareholders agreement typically lasts for the lifetime of the corporation. In other words, until the shareholders decide to dissolve the corporation, or until it is wound-up, the agreement will remain in place. Alternatively, the shareholders may provide a fixed term for the agreement with an option to renew. A fixed term may allow the shareholders to revisit the agreement and make changes before renewing.

When should a Shareholders Agreement be signed?

A Shareholders Agreement may be signed when a corporation is incorporated and before it starts to take on normal daily business activities.

After the corporation is created and shares have been issued to shareholders, the shareholders may enter into an agreement.

Conversely, an older corporation that does not yet have an agreement in place may sign a Shareholders Agreement to better establish the management of the corporation. The shareholders may also decide to enter into a shareholders agreement following a dispute.

What has to be done once the Shareholders Agreement is ready?

Once the agreement is ready, the shareholders must sign the document either electornically via email or in person. The signature choice depends on matters of convenience, preference, and security. An electronic signature may be simpler and less time-consumming for the shareholders. Each shareholder must then keep a copy of the signed agreement for their records.

Which laws are applicable to a Shareholders Agreement?

Corporate law is governed by federal law, each Province's or Territory's legislation, and case law. In other words, the law applicable to a corporation depends on where it has been incorporated. The pieces of corporate law legislation that apply to each jurisdiction are as follows:

• Canada: Canada Business Corporations Act (R.S.C., 1985, c. C-44)
• Ontario: Business Corporations Act, R.S.O. 1990, c. B.16
• Alberta: Business Corporations Act, RSA 2000, c B-9
• Saskatchewan: The Business Corporations Act, RSS 1978, c B-10
• British Columbia: Business Corporations Act, SBC 2002, c 57
• New Brunswick: Business Corporations Act, SNB 1981, c B-9.1
• Manitoba: The Corporations Act, CCSM c C225
• Nova Scotia: Companies Act, RSNS 1989, c 81
• Prince Edward Island: Business Corporations Act, RSPEI 1988, c B-6.01
• Quebec: Business Corporations Act, CQLR c S-31.1
• Yukon: Business Corporations Act, RSY 2002, c 20
• Northwest Territories: Business Corporations Act, SNWT 1996, c 19
• Nunavut: Business Corporations Act, SNWT (Nu) 1996, c 19
• Newfoundland and Labrador: Corporations Act, RSNL 1990, c C-36

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