Shareholders Agreement

A shareholders agreement is an agreement between the corporation and all of its shareholders governing the manner in which a corporation is to be managed, when shares can be transferred and how disputes are resolved.

A shareholder agreement is typically entered into between the initial shareholders during the incorporation process (or if there is only one shareholder when there is a second shareholder). The shareholders may wish to review the shareholder agreement from time to time to determine whether changes are required, such as where there are changes to the circumstances (e.g. profitability or contributions of the shareholders) or when the corporation receives funding from an investor (often the investor will insist on changes.

The following are the main considerations when drafting a shareholder agreement. These items are, at least, considered in most shareholder agreements.

• Who can elect the directors of the corporation
• how decisions are made and whether a percentage of shareholders must approve certain major decisions
• under what circumstances shares can be transferred or issued including:
  • pre-emptive rights - shareholders have the right to participate in new share issuances in proportion to their shareholders
  • right of first refusal - shareholders can sell shares to a third party as long as they first offer the shares to the corporation or existing shareholders
  • drag-along rights - minority shareholders must sell their shares if a certain percentage of shareholders chooses to do so
  • tag-along rights - where a certain percentage of shareholders are going to sell their shares, minority shareholders also have the right to participate on the same terms
  • buy-sell (shotgun) clause - a dispute resolution mechanism which requires one party to purchase another's shares in the event of a dispute
• sale events, which are events where a shareholder is required to sell their shares back to the corporation or the other shareholders, such as on bankruptcy, death, disability or divorce
• valuation provisions which set out how to determine the price of the shares where a sale event occurs
• restrictive covenants, such as confidentiality, non-solicitation and non-competition provisions
• information rights for minority shareholders
• default financing provisions for shareholder loans - for example, unless there is a written agreement to the contrary, all shareholder loans will be unsecured and accrue interest at the prime rate
• Dispute resolution provisions

A shareholder agreement is a central agreement between shareholders of a private corporation and should really be a part of every private corporation with more than one shareholder.