July 15 2015 Hugues Boisvert Founder & CEO, Business Lawyer
It is not often that people enter into a marriage already thinking about the divorce. However, prenuptial agreements exist as a safety measure and to prepare for the final outcome prior to a potential dispute. Further, the best time to enter into such an agreement is in the beginning when everyone is happy. In a business setting, it is no different. As a shareholder, it is strongly recommended that you enter into a shareholders’ agreement early on, in order to have a safety measure when things potentially go wrong in the future.
In essence, a shareholders’ agreement is a legal document that sets out the rules that must be observed by the shareholders of a company. The shareholders’ agreement should include, among other provisions, the roles and responsibilities of each shareholder and procedures to follow when there is a dispute. Business partners can often comprise of best friends or family members. Unfortunately, disagreements can arise between even the best of best friends and the importance of having a shareholders’ agreement is magnified in these situations.
Some of the advantages of having a shareholders’ agreement include:
- Defines the roles and responsibilities of each shareholder in writing so that they are bound by them;
- Defines the dispute resolution process so that the shareholders know what steps to take in case of dispute;
- Inclusion of “shotgun” clause where a shareholder makes an offer to buy out the other shareholder and the other shareholder has to either accept it or buy out the offering shareholder. It allows for a fair and speedy exit of a shareholder;
- Controls the dilution of shares so that existing shareholders do not lose their stake in the company;
- Inclusion of non-competition and non-solicitation clauses which stops a shareholder who is exiting to set up shop across the street or steal the clients;
- Defines the obligations of the shareholders when raising money in the future; and
- Defines the process of kicking out a shareholder in case of events such as a shareholder not carrying out their responsibilities or death.
A shareholders’ agreement can provide provisions that can help shareholders avoid unnecessary cost and time when disagreements happen between them. Also, in case of unforeseeable events such as one of the shareholders suddenly becoming ill, disagreements may arise as to how to continue on the business. Just as you don’t buy insurance after the disaster has already happened, it will be much more advantageous for shareholders to sign the shareholders’ agreement before the disagreements arise as an insurance to minimize the harm suffered by the shareholders and ultimately the company. It is crucial that the shareholders enter into a shareholders’ agreement when they are in good terms with each other as to remain objective.
If you do not have a shareholders’ agreement in place for your company, you should seek the help of a lawyer to draft one specially tailored to your company. For more information on the above, call/email our Founder & CEO + Business Lawyer, Hugues Boisvert at [email protected] or +1.613.747.2459 x 304
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Hugues today. 613-747-2459 ext.304, [email protected].