What Is A Shareholders' Agreement?

A Shareholders' Agreement in its simplest definition is an agreement amongst the

shareholders of a corporation which deals with the relationship of the parties.

If you are considering forming a corporation with others, you should not do so without a well written, all-encompassing Shareholders' Agreement. A Shareholders' Agreement that is not properly thought out, can be worse than none at all, so its essential this document is written by someone who will ensure that it is comprehensive and specifically contemplates the concerns of the parties it is drafted to benefit and protect.

The Shareholders' Agreement clearly defines the relationships between the shareholders and others who are intermingled between the shareholders and the company.

A well written, thorough Shareholders' Agreement is essential to providing clarity for all parties involved. It is akin to a road map guiding the shareholders through the growth of the corporation, with full understanding of the components and process.

A Shareholders' Agreement normally outlines the procedure for calling shareholders and directors meeting, banking and signing arrangements, ownership and voting rights of the shareholders in the company which include lock down procedures; restrictions on transferring shares, or granting security interests over shares; pre-emptive rights; rights of first refusal in relation to any shares issued by the company (often called a buy-sell agreement) and minority protection provisions.

The Shareholders' Agreement should also outline the control and management of the corporation, which may include power for certain shareholders to designate individuals for election to the board of directors; imposing super-majority voting requirements for "reserved matters" which are of key importance to the parties; and imposing requirements to provide shareholders with accounts or other information that they might not otherwise be entitled to by law.

Arguably the most important provisions in a Shareholders' Agreement are the ones that cover dispute resolution, including deadlock provisions and dispute resolution provisions. In addition, a Shareholders'

Agreement should deal with the death and disability of shareholders.

A Shareholders' Agreement will also outline the nature and amount of initial contribution (whether capital contribution or other) to the corporation; the proposed nature of the business; how any future capital contributions are to be made; the governing law of the shareholders' agreement; ethical practices and allocation of key roles or responsibilities.

Remember: no matter how much you may like or even feel you trust - a prospective business partner, it is wise to seek out legal advice so that you can make informed decisions and protect not only your future interest but the interests of family or other parties who may rely upon you and your decision making.

For more information on Shareholders' Agreements or any other important matter related to business and corporate law, visit http://www.barristersolicitor.ca.

by: Cindy Cohen

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