Back in September I talked about the different types of companies that are commonly encountered in business. These included proprietorships, partnerships and corporations. The proprietorship is owned and often run by one individual while the other two generally involve more than one owner. The partnership by definition has more than one owner while the corporation may have a single owner but this is often not the case.
Whenever there is more than one owner it is advisable to have an agreement in place that outlines a number of important things. With a partnership it is known as a partnership agreement. With a corporation it is known as a shareholder agreement. The owners of the corporation are known as the shareholders. The two agreements have a lot of similar elements but this time I will focus on the shareholder agreement.
The shareholder agreement typically addresses the following issues:
- Shareholder obligations and voting rights
- Rules governing purchase and sale of shares including pricing and rights of first refusal
- Rules governing disposal of shares in the case of death or incapacity of a shareholder
- Rights of shareholders – especially minority shareholders in the case of large companies
- Dispute mechanism that is binding on all parties
- Rules governing the appointment and duties of directors and representation on the board
- Rules governing banking, funding and financing of the corporation
- The nature of the corporation’s business and engaging in other businesses not related to the core business
- Rules governing the appointment of officers
- Dissolution of the corporation
This is only a partial listing of issues to be addressed. The agreement needs to be customized to suit the needs and setup of the corporation.
The whole premise of having a shareholder agreement in place is to anticipate and resolve any future issues. This is why it is important to set up and structure the agreement while all parties are on good terms and looking forward to the future of the company. To even attempt to put an agreement in place when there are major issues on the table and the acrimony has set in is futile at best and often impossible. This places everyone at the mercy of the courts.
For what it is worth, it is advisable to have a lawyer who specializes in corporate law oversee the creation of the shareholder agreement. The investment up front will make sure that it is properly drafted and respects the wishes of the participants. Also that it will stand up in court if necessary.
I hope this clarifies the whole concept and premise of the shareholder agreement. If you don’t already have one in place and it applies to your company, time to get started. Hopefully it will lay the foundation for the unlimited success of you and your corporation.
All the best of success…