The early stages of starting a business can feel like a honeymoon… until reality sets in and difficulties surface. Just like a prenuptial agreement, a shareholders agreement, often called a unanimous shareholders agreement or USA for short, sets out the nature and extent of the shareholders’ commitments and compromises, ensures they understand what to expect out of the business relationship, clarifies how to resolve disagreements before these turn into deal-breakers and explains how day-to-day and exceptional decisions are to be made.As a shareholder, you want to protect your investment; as a principal, you want the business to run smoothly. Shareholders agreements help you achieve these goals in the following ways:
Setting out who can buy shares and how each shareholder can participate in decision-making.
Which classes of shareholders have voting rights? What types of decisions require the approval of what class(es) of shareholders? What constitutes a majority decision? With how many eligible voting shareholders can a special resolution be passed? Who can buy into the corporation? Do the original shareholders have to expressly agree before someone buys into the corporation or can the buy-in be valid as long as it complies with the agreement?
These details should be carefully addressed in a shareholders agreement. This will be of particular assistance if your business plan forecasts the introduction of children, other family members or new partners in the medium-to-long term.
Determining exit options for shareholders.
Sometimes, it is better to call it quits. Shareholders agreements outline how a shareholder can be bought out and how to calculate the price of his or her shares. How many exit options are available will depend on your objectives and the specifics of your business.
Limiting the powers of directors (and their liability, in some cases).
Unless otherwise specified, directors have far-reaching powers to make decisions on behalf of the corporation without first obtaining shareholder approval. These decisions can range from entering into an agreement with another firm to selling the corporation’s property. To counterbalance these extensive powers, the law imposes important fiduciary duties on the directors to manage the corporation competently and in the best interests of the corporation.
The shareholders can choose to remove some powers from the hands of the directors or make their decision-making subject to conditions or restrictions. In such a case, the shareholders may correspondingly transfer the directors’ liability onto their own shoulders, to account for the fact that the directors now have more limited responsibilities.
Deciding what happens in case of death, disability or divorce of a shareholder.
Anything can happen, and this can affect not only a person’s family but their business venture too. There simply may not be enough time to prepare for an untimely event or to react to it in an organized fashion once it has occurred. A shareholders agreement will provide for the continuation of business operations during a shareholder’s illness or after an untimely event, the buyout of shares and winding up of the corporation, as necessary.
For example, a shareholders agreement can specify that a shareholder’s shares must be bought out in the event of divorce. The end result will be that there are funds available for a divorce settlement while making sure the ex-spouse does not inadvertently become a part of the corporation. This also helps ensure shareholdings are not tied up in divorce proceedings, and the company can continue to operate as a going concern.
Typically, the shareholders agreement would address who should replace a disabled director, and how the nomination process is to be conducted.
Other tools used to plan for these types of events are Wills and Powers of Attorney for each of the shareholders and directors of the corporation.
Establishing how financial disagreements or deadlocks at shareholders' meetings can be resolved.
A deadlock can devastate a business if there is no proper method to resolve it. The purpose of deadlock provisions is to ensure the business’ operations and value are not hampered by the disagreements of some of its members. Typically, if a deadlock is not resolved, this triggers the termination provisions of the agreement, i.e., someone is bought out of the company at a fair price. Though there are about as many ways to structure deadlock provisions as there are lawyers and clients, a typical deadlock provision will address:
what level of disagreement constitutes a deadlock;
the dispute resolution method(s) to use to resolve it; and,
if the dispute resolution method(s) has not resolved the deadlock, how the termination provisions of the agreement will apply to this situation.
Explaining how and when shareholders' and directors' meetings can be held.
It can sometimes be helpful to set out how often directors or shareholders meetings will be held, how notice will be given to those entitle to attend, and where those meetings shall be held. While there are default rules for these procedures, the unique needs of the corporation require changes from the default.
Managing future amendments to the agreement and corporate bylaws.
A shareholders agreement should set out how the agreement itself can be changed or terminated. Typically, this will require the consent of either all or a high percentage of the shareholders.
A shareholders agreement can also make it more difficult to change the corporate structure of the corporation by amending the corporation’s articles or by-laws by requiring a higher level of shareholder consent. This would protect the interests of minority shareholders.
Binding on the founding and new shareholders alike.
A shareholders agreement is “unanimous” if all shareholders have agreed to its terms. However, a shareholders agreement can also be made only amongst shareholders of one particular class or between shareholders of two or more classes. A shareholders agreement can even be made where there is only one shareholder in the entire company! This is often done if a parent is leaving the shares of that company to several children through his or her will.
Typically, a shareholders agreement requires that any new shareholder must also comply with the terms and conditions of the agreement. This ensures that the deal made between the original shareholders continues to be effective notwithstanding a change in control.
Shareholders Agreements are an essential part of successful succession planning for your business as are Wills and Powers of Attorney for all key officers of the corporation.