5 Key Considerations When Preparing a Shareholders Agreement for Your Privately Owned Business Corporation
A well-drafted shareholders agreement is an essential tool for any privately owned business corporation with multiple shareholders.
It sets out the rules of engagement, governs key decisions and can help prevent future disputes. Here are five key items to consider when creating or updating your shareholders agreements.
1. Management of the Corporation
A strong shareholders agreement should clearly outline how the corporation will be governed. The agreement might touch upon how directors are elected or appointed to the board and can provide procedures the board must follow when making decisions. The agreement should also identify specific fundamental matters — such as selling a significant portion of the corporation’s assets, changing the nature of the business or entering into contracts — that should require the consent of all or a certain majority of the shareholders.
2. Buy-Sell Provisions
A shareholders agreement can address how a shareholder can sell their shares or purchase the shares of others. Common mechanisms include:
- Call option: Allows the corporation to require a shareholder to sell their shares back to the corporation.
- Put option: Enables a shareholder to require the corporation to purchase their shares.
- Shotgun clause: Allows a shareholder to offer their shares at a set price, requiring the other shareholders to either buy them at that price or sell their own shares on the same terms.
- Piggyback right: Allows minority shareholders to automatically sell their shares if a majority shareholder sells their shares.
- Drag along right: Allows the majority shareholder to require that the other shareholders sell their shares to a third party as part of the sale of their own shares.
Including the right buy-sell provisions can ensure your interests as a minority or majority shareholder are accounted for, and allow shareholders to exit the business smoothly.
3. Restrictive Covenants
To protect the corporation’s interests, consider including non-competition provisions that prevent shareholders from running a competing business, or non-solicitation provisions that prevent soliciting the corporation’s employees, clients or suppliers. These covenants are particularly important where trade secrets, customer lists or supplier relationships are integral to corporation’s value and success.
4. Death and Disability
The agreement can address what happens if a shareholder dies or becomes permanently disabled. It is common to include provisions requiring the corporation or the remaining shareholders to purchase the affected shareholder’s shares. In many cases, shareholder’s agreements mandate that the corporation maintain insurance policies to be used to fund these buyouts. Considering these circumstances ahead of time can help ensure the business remains financially stable during challenging times.
5. Dispute Resolution
While shareholders often begin their relationship on good terms, disputes can and do arise. A shareholders agreement can include mechanisms for resolving disagreements — whether through mediation, arbitration or another process. Having a clear process in place can prevent disputes from escalating, help preserve relationships and keep the business running smoothly.
These five considerations represent just a few of the many important issues that can be addressed in a shareholders agreement. Every corporation is different, and your agreement should reflect your specific business goals and shareholder relationships.
If your privately owned corporation is considering drafting or updating a shareholders agreement, seeking legal advice is highly recommended.
For guidance tailored to your business, feel free to contact me at mramsey@rossmcbride.com or reach out to the professionals at Ross & McBride LLP. We’re here to help.
This article was originally published by The Hamilton Spectator.
