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What is a shareholder agreement?

April 4, 2023

A shareholder agreement sets out solutions for potential issues that are likely to cause conflict among the shareholders of a business. Your business is vulnerable without a good shareholder agreement that provides for the unexpected. Want to invest in the future stability of your business? Take the time to set the boundaries of your business relationships.

 

Professionals agree that it's good practice to approach every partnership with a contract that provides terms for separation and other eventualities. In business, this type of contract is called a shareholder agreement. A shareholder agreement is the rule book that governs the operations of a business, the conduct of its shareholders and the sale of its shares—all with a view to avoiding a crisis that could adversely affect the business.

The 3 types of shareholder agreements

 1. Buy-sell agreement

A buy-sell agreement mainly covers the mechanisms for the purchase and sale of the business' assets and shares, both during the lifetime of the shareholders and in the event of their death.

2. Shareholder agreement

Elle prévoit généralement les modalités d’achat et de vente que l’on retrouve dans le premier type de convention, auxquelles s’ajoutent des dispositions régissant le comportement des actionnaires qui conviennent davantage aux objectifs et aux besoins de ceux-ci.

3. Unanimous shareholder agreement

A unanimous shareholder agreement typically expands on the provisions of a shareholder agreement by restricting the powers of directors (and broadening the powers of shareholders) to manage the business. 

The 5 most important situations to plan for

1. Voluntary withdrawal

When a shareholder wants to sell their shares, it can be a headache for the other shareholders who have to find a way to buy out the exiting shareholder. It's important to protect the rights of the remaining shareholders while respecting the exiting shareholder's right to withdraw and be compensated for their shares.

Ideally, the remaining shareholders will acquire the shares of the exiting shareholder, provided they have the means. In some circumstances, it's also possible for the business itself to buy back the shares. If neither of these solutions is possible, the remaining shareholders should have the right to refuse the sale of the shares to an undesirable party.

2. Forced withdrawal

If a shareholder is not in a position to perform their obligations due to bankruptcy or imprisonment, for example, the other shareholders should be able to force that shareholder's withdrawal. This right is intended to be used in exceptional circumstances only and not as a means to end a conflict. The shareholder agreement should specify in which situations the shareholders may force the withdrawal of a problematic shareholder and stipulate the procedure to be followed.

3. Conflict (the shotgun clause)

A shotgun clause allows for one partner to force another to sell them their shares or for the targeted partner to buy out the offering partner's shares. This makes it possible for a shareholder to leave the business without having to resort to voluntary withdrawal, which is often disadvantageous for the exiting shareholder. This clause can be used to settle conflicts between shareholders that may otherwise be impossible to resolve.

4. Death

To prevent any issues with the estate when a shareholder dies, it's a good idea for businesses to have a clause in their shareholder agreement stating that the deceased is deemed to have sold their shares to the remaining shareholders at the time of death. It's common for shareholder agreements to include a requirement for life insurance payable to the business so that it will have the funds to buy back a shareholder's shares in the event of their death.

5. Third-party acquisition

To minimize complications, it's crucial for businesses to have a clause in their shareholder agreement that provides for potential acquisition by a third party.

Your business is vulnerable without a good shareholder agreement that provides for the unexpected. Even if you're fortunate enough to steer clear of major conflict with your partners, navigating disagreements can cost time and money. It's best to plan ahead for any potential issues. Want to invest in the future stability of your business? Take the time to set the boundaries of your business relationships.

 

Need some advice? A Desjardins account manager can refer you to the right professional for your needs.