Business

WHY YOUR COMPANY NEEDS A SHAREHOLDERS’ AGREEMENT

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Many companies are started each year by friends, relatives or former colleagues who have a great business idea and a desire to create a successful business. Everyone is excited about all of the wonderful things that they wish to accomplish. No one is thinking about dying, getting divorced, having a disagreement over more money needed for the business or how to run the business. These life events can create big problems if you don’t have a formal written agreement in place which sets out the ground rules for your ownership in the business, the powers of each shareholder and a mechanism for resolving disputes amongst the owners. The easy solution is to have a legally drafted Shareholders’ Agreement. This is an absolute must have in one’s business toolbox.

A Shareholders’ Agreement allows the owners of a company to agree on a range of topics relating to their involvement in the company. Such an agreement provides owners with certainty about what the rules are in a voting deadlock, retirement, a desire to sell shares, death or permanent disability. All business owners should have an effective roadmap to deal with life events.

A Shareholders’ Agreement will be unique to each corporate and personal situation and there is a wide range of issues that can be dealt with through various rules.

Some common issues that can be addressed in a Shareholders’ Agreement include:

  • You no longer get along with your other shareholder(s) and you either want that person out of the business or you want out of the business yourself.
  • Your other shareholder dies and leaves all of his shares to his wife and children, with whom you do not wish to be involved in the business. Conversely, the widow(er) may not want to remain involved in the deceased spouse’s business.
  • Your fellow shareholder becomes disabled or otherwise incapable of participating in the business.
  • You wish to retire.
  • Your fellow shareholder’s husband ends up with some shares as part of their divorce settlement.
  • Your fellow shareholder who owns a majority of the shares moves to Tahiti and the corporation loses its status as a Canadian Controlled Private Corporation and the tax advantages that go along with it.
  • Your fellow shareholder has received an offer to purchase his shares from a third party.
  • Your fellow shareholder gets into financial trouble and her shares in the corporation are transferred to a bank, a trustee in bankruptcy or to another party with whom you do not want to be in business.
  • You need additional cash to fund new product development, take a product to market, buy new computer equipment or for any other purpose but your fellow shareholder cannot provide his share of the additional cash that is required.

?Who Needs a Shareholders’ Agreement?
The correct answer is all owners of a company with more than 1 shareholder. The only exception to this is if you have a habit of arguing with your bad self! 🙂
The actual process of working through a Shareholders’ Agreement will help you and your co-owners identify possible business risks and provide an opportunity in advance to discuss how to resolve issues should they arise. It can also give you the chance to set aside resources such as life, disability or critical illness insurance. You can also deal with retirement planning for the current owners. It is beneficial to work through this process at the beginning of the business relationship, or at least when goals are similar and shareholders are in good health and in a position to be objective over who should take over the business in the future.

What Happens If No Agreement?
Although it may be possible for shareholders to try to negotiate an arrangement once an unfortunate event has happened, depending on the event, the interests of each shareholder may have diverged creating the potential for disharmony in the business relationship. In addition, a shareholder could lose all leverage and be disadvantaged in negotiations if they become ill as they are no longer able to actively participate in the business. The take away here is to get a written agreement in place before any unfortunate life event happens. By doing so, you avoid the need to spend big bucks hiring Harvey Specter to litigate and do damage control!

When to Get a Shareholders’ Agreement?
Now! Quit procrastinating. Don’t be a tardy Nelly!
It is always easier to get an agreement in place when everyone is happy. That might sound obvious, but how often do you hear that people have gone into business together saying they don’t need to spend the time and money on drawing up an agreement because they all agree about how the business will be run etc., but then down the line their views diverge or circumstances change and there is a disagreement? That can be much more expensive, time consuming and stressful to resolve especially when they take their focus and attention off their business. Too many business partnerships are governed by goodwill or shoddy contracts—leading to disastrous results. Don’t be a victim.

With this in mind, C2K Law Corporation provides timely legal advice in relation to all types of corporate/commercial and business law matters. We strive to deliver an affordable, value-added service to suit your individual needs. We recognize that you are concerned about the costs of legal services. We do our best to provide a low cost value added service by leveraging technology and reducing overhead expenses passing the savings on to you. We use our entrepreneurship in our creative problem-solving approach, which enables us to take immediate and decisive action. Call 604.719.5122 or email us at bal@c2klaw.com for a complimentary consultation.

*The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
© Bal Bhullar, President, C2K Law Corporation.

Bal Bhullar
Bal Bhullar is a corporate/commercial lawyer who owns and operates C2K Law Corporation. Bal has over 20 years of international and domestic practice experience. He has worked in private practice in Vancouver and Bermuda as well as in-house with public and private companies in the mining, aviation, telecom and technology, construction, oil and propane, insurance, management consulting and health care industries. Bal's areas of expertise include corporate finance, banking law, mergers and acquisitions, joint ventures, corporate restructurings, governance and compliance, company law, contracts and all types of commercial transactions. Bal is the member of the Law Society of B.C. and is admitted as a Barrister and Attorney in Bermuda. Bal is a business savvy lawyer who is solutions oriented and focused on delivering high value advice and service to all of his clients.
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