Structure | Shareholders | Directors | Officers | Shares | Shareholders Agreement | Advanced
The Importance of Shareholders' Agreements
Contact Neufeld Legal for your corporate legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
Shareholders' agreements are essential in multi-shareholder situations, especially when they are drafted correctly by an experienced lawyer. There is so much that can go into a shareholders' agreement, that knowing what to include and exclude can go a long way to building a lasting business relationship amongst the shareholders and the corporation. It also tends to provide more effective exit strategies for the shareholders, as by establishing a base-line exit strategy, it allows the shareholders to more effectively negotiate (since there is a base-line, pursant to which the shareholders are contractually mandated to exit upon invocation and pursuant to the shareholders' agreement, there is a greater willingness to attempt to reach a negotiated settlement).
Shareholders' agreements provide a plethora of exit strategies, including provisions for a strategic shot gun, put-call, piggy-back, drag-along, first right of refusal and default (together with death and disability for human shareholders). By selecting the appropriate exit provisions and thereafter drafting them to the objectives of the shareholders and their future, the underlying fundamentals for the business and its shareholders is that much better situated. And it is with that realization that the shareholders are able to get the most of their investment in the corporation and its business.
A comprehensive shareholders' agreement also serves to define and structure the management and control of the corporation. In the absence of a shareholders' agreement, most Business Corporations Acts generally dictates that control resides with the Board of Directors, who are elected by the majority of shareholders. This default can leave minority shareholders vulnerable to being outvoted on critical decisions. A shareholders' agreement addresses this by setting custom approval thresholds, specifying which major decisions (e.g., selling the company's assets, incurring significant debt, or issuing new shares) require a supermajority or even unanimous shareholder consent. This protection ensures that all shareholders, regardless of their equity stake, have a voice on fundamental matters impacting the business's direction and their investment.
Meanwhile, disputes among shareholders are a common cause of business failure. Relying solely on costly, protracted, and public litigation to resolve internal conflicts can be devastating to a private corporation. The shareholders' agreement is essential because it sets out a clear, private dispute resolution process. This often includes mandatory steps like negotiation, mediation, or arbitration before resorting to court action. Furthermore, a comprehensive shareholders' agreement can include specific deadlock-breaking mechanisms, such as the aforementioned Shotgun Clause, which forces a resolution when shareholders can no longer agree on the management of the business. By codifying these steps, the agreement drastically reduces the financial and emotional toll of disagreements.
Thus, the value of a comprehensive shareholders' agreement emanates from its role as a blueprint for long-term stability and continuity. By addressing the "what-ifs", from management deadlocks to a shareholder's unexpected death, the agreement preserves the business’s operations and value, making it a more secure and attractive investment. For shareholders, having a well-drafted shareholders agreement is not merely a legal formality; it's a strategic investment that provides peace of mind and demonstrates organizational maturity to potential lenders or investors. It transforms an informal partnership into a resilient, professionally managed corporate structure, safeguarding the collective and individual interests of the owners for the life of the commercial enterprise.
As such, formulating, drafting and negotiating a shareholders' agreement with Neufeld Legal, will enable you to profer the benefits from the professional services of an experienced corporate lawyer who understands the importance of drafting and implementing the appropriate shareholders' agreement. So if you are looking to enter into a shareholders' agreement for your company, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
