We have an estate plan and we have addressed what happens to our shares when we die in our Wills – do we really need a Shareholders’ Agreement?
In this jurisdiction, many small businesses are incorporated and owned by spouses, a group of family members or long-time friends and colleagues. There is a sense of informality which permeates and it is not unforeseen that shareholders in these incorporated businesses have not even addressed what happens to their shares on death in a Will.
However, Shareholders’ Agreements serve many purposes, many of which are not always considered by shareholders in closely held corporations owned by parties with a long-term personal relationship.
Preparing and finalizing a Shareholders’ Agreement provides an excellent opportunity to discuss the “what ifs” that affect business with the corporation’s lawyer and accounting professionals. It also allows shareholders to develop procedures that best and fairly serve their corporation. It is the predominant tool used to prevent shareholder disputes in the future. It is a sound investment because disputes cost money!
In my experience, shareholders often list the following as being the main reasons why they are inquiring about a Shareholders’ Agreement:
- We want to agree on restrictions on transfers of shares and the issuance of new shares;
- We want to institute a procedure to deal with shares in the event of death of a shareholder;
- We want to institute a procedure to deal with shares in the event of disability of a shareholder;
- We want to institute a procedure which will allow a shareholder to exit the business voluntarily.
It is interesting to note that there are other circumstances in which shareholders may be tasked with dealing with shares of another shareholder and would benefit from a mandatory procedure. Such circumstances would include criminal conviction or bankruptcy of a shareholder and a shareholder’s marital breakdown.
However, I find that it is the other reasons for preparing a Shareholders’ Agreement which really result in fruitful discussion and which enable shareholders to address other very important reasons for making a Shareholders’ Agreement, including the following reasons, namely:
- Provision of an agreed upon mechanism for day-to-day operation and management;
- Provision of an agreed upon mechanism for financing operations; and,
- Provision of an agreed upon mechanism for distribution of profits.
Provision of an agreed upon mechanism for day-to-day operation and management involves considering the basic needs of the business. A Shareholders’ Agreement can enable shareholders to establish a procedure for appointing directors and managers. It can clarify the role of shareholders in the business and provide a mechanism for hiring key employees. It can also include matters which will require unanimous shareholders consent such as major purchases, expenses for which directors will be reimbursed and sale of the business.
Provision of an agreed upon mechanism for financing operations can clarify the preferred method of financing for a particular group of shareholders. A Shareholders’ Agreement can verify a shareholder’s obligation to provide a personal guarantee for bank financing. It can also institute a procedure for shareholder contributions to capital requirements which are often made on a proportionate basis and which may be considered an advance that results in interest payments.
Provision of an agreed upon mechanism for distribution of profits may involve providing established forms of payment for salaries, wages, bonuses, dividends and management fees. A Shareholders’ Agreement may schedule the frequency of such payments and set out who must approve such decisions. It may instruct directors to obtain professional tax advice on an annual basis.
If you are considering having a Shareholders’ Agreement prepared for the shareholders of your incorporated business, please contact one of Key Murray Law’s lawyers who practise Business and Corporate Law.
Bobbi-Jo Dow Baker
Legal information appearing in this article and elsewhere on Key Murray Law’s website is intended for informational purposes only and is not intended to substitute for or replace any legal or other professional advice. If you have specific concerns or a situation in which you require legal advice, you should consult directly with one of our lawyers.