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Why draw up a shareholders’ agreement?

 

Starting a business with a partner can be very exciting. However, in order to succeed, it is essential to draw up a shareholders’ agreement during the outset of your business venture. You must be informed about the right questions and protect yourself as much as possible from all contingencies.

Believe it or not, there are a thousand and one contingencies that you might not have accounted for. Your partner may want to leave the company, or die, or want to sell their shares to competitors, etc. This is why you must draw up a shareholders’ agreement, above all to protect your interests as a shareholder.

 

What exactly is a shareholders’ agreement?

It is a contract between different people (physical or legal) that permits:

  • clarification of their relationship within the company
  • establishment of the procedures to be followed according to various possible situations
  • prevention of conflicts

The content of the agreement that you and your co-shareholders decide to include is up to you. However, it cannot contravene applicable laws.

 

Below, let’s look at a few situations that can help you visualize the importance of a shareholders’ agreement.

 

Question 1: In the event of the death of one of the shareholders, can their family become involved in the share ownership?

 

Imagine for a moment that, unfortunately, your business partner dies. Some time later, their family informs you that they want to become involved in the management of the company. Given that you are not pleased with this decision, you want to react. What can you do if there is no shareholders’ agreement?

If an agreement exists, it can anticipate this eventuality. This means that a clause is provided, and that in the event of death the company or the surviving shareholders may automatically purchase the shares in accordance with the conditions and procedures often pre-established in the shareholders’ agreement.

This type of clause prevents the shareholder’s heirs from becoming shareholders themselves during such events. However, without a shareholders’ agreement, there will be no set rule.

 

Question 2: When a shareholder wants to leave the company, can he or she sell to a direct competitor if no shareholders’ agreement has been signed?

 

Sometimes business partners go their own way. However, this is not what we think about when we start our company with our co-shareholder. What’s more, we are far from imagining that our partner might one day consider selling their shares to our direct competitor.

Of course, there are mechanisms that prevent unfair competition, even if there is no shareholders’ agreement. And recourse may be taken even under certain circumstances. However, how partners must act among themselves is much clearer when it is defined in a legal document.

For example, the shareholders’ agreement may restrict the right of shareholders to sell their shares to third parties. This is why it is strongly recommended to adopt an agreement from the start.

 

Question 3: If you want to leave your company and your co-shareholder cannot afford to purchase your shares, are you obliged to wait to find a buyer?

 

As previously mentioned, plans can change. Of course, we never think of this at the beginning. And yet, it is true. And the day you want to sell, you want to get the funds for the sale of your shares. What happens if your partner cannot buy you out?

Some mechanisms may be covered in the share capital, but often, it is not in the event of a separation with a co-shareholder. If you have a shareholders’ agreement, the agreement may include a clause detailing the procedure to follow to sell your shares. It all depends on how your agreement is drafted.

 

A shareholders’ agreement is a means to protect all business partners.

When you go into business, it is hard to imagine all the situations listed above. Rather, you are thinking of conquering the world with your partner. Moreover, there is no indication that this is impossible.

As a law firm working with entrepreneurs on a regular basis, it is our obligation to tell you that a shareholders’ agreement is absolutely necessary.

Don’t forget: over the years a business can evolve, just like yourself and your co-shareholder. This is why it is important to be well prepared in order to be able to react to all contingencies. Believe us, business law, especially when it comes to litigation, is filled with the unexpected. It is better to be prepared and work as a team.

 

Contact us to learn more about shareholders’ agreements.

 

Blog post written by Lora Cianci and Eva-Samuel Vachon

 

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One thought on “Why draw up a shareholders’ agreement?

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    Gurudev Singh - January 10, 2019

    Thanks for sharing such an informative blog with us and Now I am clear that how Shareholder Agreement is beneficial for shareholders of a company. Thanks, appreciate it.