Business Management Articles
Shareholders’ Agreement Makes Molehills out of Mountains
Bob McMahon
Mississauga Business Times
Su had a buyer that wanted to purchase her company but Su’s children, who are minority shareholders, refused to sell their shares.
The shareholders in Kristina’s company are arguing about how much of the company's profits they want to distribute as dividends.
Two of Benny’s children, who are shareholders and work in the business, are having an escalating disagreement regarding their responsibilities.
Ernie’s business partner died and his partner’s spouse, who inherited his shares, is demanding to become active in the business.
In each of these cases, owners did not anticipate having disagreements with their close friends and family members who were shareholders in their companies. In each case they didn’t have a shareholders’ agreement. And in each case, emotional and costly business disagreements would likely have been avoided if they had.
A shareholders’ agreement is a contract between the shareholders of an incorporated business (in the case of an unincorporated partnership, this would be a partnership agreement) that documents their agreement to the funding, structure and management of the business, and sets out their responsibilities and obligations. The goal of these agreements is to facilitate the future success of a business by having the
shareholders agree on the rules that will govern their relationship in various circumstances. The process of working through an agreement enables shareholders to identify potential business risks, events and disputes and agree in advance how they would resolve these.
Shareholder agreements generally address three broad areas: what each shareholder contributes to the business; how they will operate the company; and what happens when a shareholder exits the business. Each agreement, however, is specific to the organization and individuals involved and any issue of mutual concern to shareholders should be covered in the agreement. Following are some examples.
- share ownership and restrictions
- financing of the business and capital contributions and withdrawals
- rights/obligations/duties/responsibilities of shareholders
- funding for purchase of shares and life/disability/critical illness/key person insurance
- decision making, especially for major business events such as sale or merger
- voting issues
- valuation of the business
- appointment of directors
- management/financial/reporting responsibilities
- profit distributions
- remuneration of shareholders and work expectations
- employing family members
- shareholder/director loans
- dispute mechanisms
- buy-sell share provisions
- non-compete covenants
- exit rights: divorce/bankruptcy/death/incapacity/dismissal/withdrawal of a shareholder
- amendments to the shareholders’ agreement
The importance of a timely shareholders’ agreement can’t be overstated. There are so many important issues that arise when operating a business today that can trigger internal strife if there are no guidelines in place to handle them.
While the ideal time to develop this contract is when a business is launched or takes on new partners/shareholders, it can support the enterprise at any stage of development. Most important: put an agreement in place when you and your fellow shareholders are enjoying a good relationship, good health and can be objective. This is the time when a shareholders’ agreement can make molehills out of mountains.
Bob McMahon is a partner of BDO Dunwoody LLP (www.bdo.ca). One of Canada’s leading accounting firms, BDO helps entrepreneurs and family businesses succeed. If you have questions about this article or you would like to receive BDO’s Tax Factor newsletter, contact Bob in the Mississauga office at (905) 270-7700 or bmcmahon@bdo.ca.
