Shareholders’ Agreement: Everything You Need To Know

What is a Shareholders’ Agreement and how might it benefit your business? In this article, we’ll explain the purpose of a Shareholders’ Agreement and why many businesses choose to have one prepared early on. We’ll also provide you with a rundown of all the jargon you’ll find in a Shareholders’ Agreement—from piggyback rights to shotgun clauses!

What is a Shareholders’ Agreement?

A Shareholders’ Agreement is first and foremost a contract between the owners of a company.  It’s often called the business prenuptial agreement as it lets the owners of a company map out a process to resolve disputes and add rules for managing the company and ownership structure. Important provisions within a Shareholders’ Agreement include the decision-making powers of directors and shareholders, restrictions on the sale and transfer of shares, and the process for resolving disputes.

If you’re the only owner of your business, then you won’t need to worry about a Shareholders’ Agreement.

Why does your business need a Shareholders’ Agreement?

1) Decision making and disputes

When you start your business, you and your partners may expect smooth sailing going forward. But conflicts are inevitable in business, and shareholder disputes can contribute to the failure of small businesses all too easily. With a Shareholders’ Agreement in place, you can proactively decide how you plan to resolve specific issues productively, including specifying dispute resolution mechanisms that are agreed to in advance.

Also, the laws governing corporations in Canada give extensive powers to a company’s directors. In some companies, this legal default situation is satisfactory and the directors can make all important decisions for the company. In other companies, particularly small and growing companies, the shareholders want to directly make important decisions without relying upon the directors. A Shareholders’ Agreement can be used to transfer these decision making functions from directors to the shareholders.