What is a shareholder agreement?

A shareholder agreement offers solutions to problems that are likely to come up and create conflict among shareholders. Without a good shareholder agreement, your business is vulnerable to the unexpected. The time you spend on defining your business relationships is an investment in the stability of your business's future.

Experts agree that all unions require a contract that states, among other things, the separability clauses. In business, this type of contract is called a shareholder agreement. It details the rules related to the sale of shares, shareholder governance and corporate governance with the purpose of avoiding a crisis that could adversely affect the enterprise.

3 types of shareholder agreements

  1. Purchase and sale agreement

    It addresses mainly the buy-sell mechanisms, both at the death and during the life of the shareholders.

  2. Shareholder agreement

    It includes all the provisions governing shareholder conduct in addition to all of the buying and selling arrangements found in the first type of agreement.

  3. Unanimous shareholder agreement

    In addition to all the provisions of a shareholder agreement, this type of agreement includes a number of clauses pertaining to corporate governance.

    Though it's impossible to cover everything, a shareholder agreement must provide a wide range of solutions to a variety of situations that could arise and significantly impact the partners' initial relations.

Top 5 situations to plan for

  1. Voluntary withdrawal

    A shareholder's voluntary withdrawal causes problems to other shareholders who have to find a way to buy out the exiting shareholder. Therefore, it's important to protect the rights of the remaining shareholders while maintaining the exiting shareholder's right to withdraw and get compensation for their shares.

    Without a doubt, the ideal solution is for the remaining shareholders to acquire the exiting shareholder's rights, if they have the means. Under certain conditions, the company can buy back the shares itself. If neither of these solutions is possible, the remaining shareholders should have the right to refuse an undesirable shareholder.

  2. Forced withdrawal

    It's preferable for shareholders to force the withdrawal of another shareholder incapable of fulfilling their obligations following bankruptcy or imprisonment, for example. However, this right should remain an exception and not a means to end a conflict. Therefore, the shareholder agreement must prescribe cases where shareholders can force the withdrawal of a problematic shareholder, as well as the procedure to be followed.

  3. Shotgun clause

    The shotgun clause allows one shareholder to force another shareholder to purchase or sell their shares in order to leave the business without having to resort to voluntary withdrawal, which is not beneficial for the exiting shareholder. The shotgun clause is used to settle conflicts between shareholders that are impossible to resolve otherwise.

  4. Death

    It's preferable to have a clause stating that the deceased shareholder is deemed having sold their shares to the other shareholders at the time of death so the estate doesn't get involved in the company. It's common for the shareholder agreement to provide the obligation to take out life insurance where the business benefits so money will be available to buy back the shares upon the shareholder's death.

  5. Third-party acquisition

    A clause that provides for any possible third-party acquisition is essential and will help prevent numerous ensuing complications.

Without a good shareholder agreement, your business is vulnerable to the unexpected. Even if you're fortunate enough to avoid conflict with your partners, negotiating an acceptable solution will cost you time and money. You're better to address these matters before they arise. The time you spend on defining your business relations is an investment in the stability of your business's future.

Feel free to consult with your Desjardins account manager who, based on your needs, will refer to one of our many experts.