Setting up a corporation is both exciting and time-consuming. There are many essential steps to take and things to remember, from writing your business plan to securing financial backing for your idea. Once you have written your Articles of Incorporation, you may be wondering if there are more documents you need to file.
One crucial business document to consider is a shareholder’s agreement. This written document is integral to your business in many ways, but what is it, and how do you create one? Read on to learn more about shareholder’s agreements, when they are used, and how to start one, and reach out to Hometown Life Insurance experts for more details.
What is a Shareholder’s Agreement?
A shareholder’s agreement is a written document signed by all parties to the contract. It is meant for corporations with two or more shareholders. The agreement spells out various provisions important to governing the business, such as how decisions are to be made, how disagreements will be handled, and how additional shareholders will be added. While the agreements vary depending on business type and structure, they include many standard provisions.
Who is Included in a Shareholder’s Agreement?
All shareholders should be listed and be signatories to the agreement. You may also consider including investors depending on their role in the company.
Who Needs a Shareholder’s Agreement?
A shareholder’s agreement can be a sound idea for corporations with two or more shareholders. If you are a sole business owner, you do not need one. Still, if you consider adding shareholders or investors in the future, you should consider drafting a shareholder’s agreement to protect your business and the shareholder’s interests.
Shareholder agreements allow you to write out how the business will be managed and agree in advance with all shareholders how decisions will be made and disputes handled. A shareholder’s agreement helps to ensure expectations are communicated and agreed to and protects each signatory.
Common Provisions Included in Shareholder’s Agreements
While the specific provisions differ from business to business, there are several common points often included in shareholder’s agreements.
- Board status – A common shareholder agreement provision grants the right to sit on the board of directors to each shareholder. This privilege otherwise would be restricted to the decision of the majority shareholder.
- Decision-making – The shareholder agreement may spell out how decisions are made by vote – for example, does one veto cancel the decision? The Canadian Business Corporations Act standard is a two-thirds majority vote, so your shareholder agreement could amend that to a unanimous vote or another percentage if desired.
- Division of shares – Another common provision is outlining how future decisions about shares will be made. For example, a pro-rata method may be used to determine each shareholder’s obligation and percentage of shares – their future division equals the percentage of their initial financial contribution to the business.
- Purchase of shares – Similarly to the division of shares, the shareholder’s agreement can dictate how additional purchases of future shares can be purchased. This ensures the pro-rata division stays equal by enforcing that additional shareholders may only be added by unanimous vote.
- Share transfer restriction – This gives further control over additional future shareholders by restricting how shares are distributed. It allows the original shareholders to refute new ones.
- Right of first refusal – If a shareholder wishes to sell their shares in the future, this clause determines that the other shareholders will have the first option to buy the shares before an outside individual.
- Non-compete clauses – These provisions protect the business by forbidding a shareholder from taking their ideas and knowledge to a competitor. Non-compete clauses may extend beyond the time the shareholder is involved, say another two years after leaving the corporation. These provisions are meant to protect the intellectual property assets of the firm.
- Confidentiality clauses – A common clause, confidentiality agreements are included to ensure shareholders do not give away trade secrets or proprietary information to the public or competing firms without prior permission.
- Dispute resolution – Many shareholder agreements dictate how and where disputes will be handled. Disagreements happen and having a process to resolve them in advance is essential.
- Termination of the agreement – Another common provision is the termination or dissolution of the agreement – the shareholders agree on how the agreement will end and what happens when it terminates.
Special Agreements
There are two special types of shareholder agreements recognized by the Canada Business Corporations Act (CBCA).
1. Unanimous Shareholder Agreements
A unanimous shareholder agreement is a specific agreement that all shareholders may sign, giving some or all the powers usually reserved for directors to the shareholders. The CBCA requires specific language in this type of agreement – the transfer of powers and their accompanying rights and responsibilities from the directors to the shareholders must be explained in writing for it to be valid. It is important to carefully considered the language used when drafting shareholder agreements.
2. Pooling Agreements
The second special type of shareholder agreement is a pooling agreement. This is a written agreement that is used to determine how shares are handled. Pooling clauses could be included as a provision in the shareholder’s agreement, or they can be drafted as a standalone pooling agreement instead.
How do I Start a Shareholder’s Agreement?
There are many helpful resources to start your shareholder’s agreement. The government offers assistance on their website to help you understand more, and there are templates available for download. Start by reviewing the resources and meeting with your other shareholders to discuss the agreement. Drafting it together can help ensure agreement among all parties.
Since every business is different, you should consider your individual needs when drafting your shareholder’s agreement. The experts at Hometown Life Insurance can help.
How do I Learn More?
Now that you know more about creating a shareholder’s agreement, you can contact Hometown Life Insurance experts for more information. Our licensed professionals will be happy to answer any questions you have.
