Entrepreneurship is a rewarding adventure that can be dangerous for people. Who are poorly informed of their rights or who do not adequately protect the interests. And legal relationships that may bind them to their partners in a business through a M&A advisor.
When a company is incorporated, it is subject to provincial or federal laws. Depending on the chosen jurisdiction. And the right of ownership of this distinct legal entity that is the company is exercised through the holding of shares. In other words, the shareholders are the “owners” of the company.
I sometimes hear, in the context of my practice, horrors such as: “I know that we are three shareholders. But they are my childhood friends, we have known each other for 30 years. We don’t need a shareholders’ agreement. »
Until proof to the contrary, everyone is honest, and everyone is “of their word”. However, when it comes to money or business with the help of M&A advisory, conflicts of all kinds can arise. And even close or related people are not immune. History has too often proved that man can be ready for any meanness to achieve his ends…
A shareholders’ agreement must be signed when the agreement is harmonious within a company. And everyone is pushing in the same direction. Without such a precaution, a dispute between shareholders can escalate, spiral out of control.
Reducing the powers granted to the directors and at the same time. Increasing those of the shareholders business, ensuring within the company the maintenance of a proportional holding of the shares. Even upon departure or the arrival of a new shareholder. Prevent shareholders from selling their shares to third-party purchasers, and more generally. Protect the financial interests of shareholders and the prosperity of the company in the medium and long term.
Among the most common clauses is that of the “right of first refusal”. If one of the shareholders wishes to sell his shares to a third person. Who is not a shareholder of the company. The latter must first offer them to the shareholders already in place. Either in proportion to their previous holding or at a person named in advance in the agreement.
It is even possible to provide for an order, namely to whom the shares are first offered. And in the event of refusal by this beneficiary, who may be the second to decide. With respect to various classes of shares that are provided for in the capital stock of the company.
Other situations “outside the shareholder’s control” may arise, in addition to “going out of business” for various reasons: death, bankruptcy, illness, disability, fraud or theft within the company, absence, contravention of a commitment between shareholders, etc. The occurrence of one of these situations can lead to an automatic offer made to the remaining shareholders who must acquire them or even an offer to the company itself which can buy back the shares of the shareholder who leaves the company.
A host of other clauses may be provided, in particular the obligation of each shareholder to take out an insurance policy on his life, with the other shareholders as a designated beneficiary, such a policy allowing the surviving shareholders or even the company to redeem shares of the deceased shareholder directly from his estate.
Clauses providing in advance for the mechanisms used to establish the sale or purchase price of the shares are also essential and several options are possible business, as long as the said clause provides for a fair, rapid, and efficient mechanism, leaving no doubt about its interpretation.
Then, as in any type of contract, penalty clauses must be provided to ensure compliance with the said agreement.
Clauses of a tax nature and dealing with the rights and obligations of shareholders in given situations finally complete the varied range of possibilities. This agreement must, all in all, settle in advance any conflicting situation or any event likely to lead to changes within the company.
Therefore, beware of standard templates where you only have “blanks” to fill in. A poorly drafted agreement will hurt you more than it will help you. Properly protect your rights: consult a specialist in the field, consult your notary.
