Do You Need A Shareholders’ Agreement?
Whether you’re launching a new venture or your existing business has grown and you’re ready to take things to the next level, incorporation is a momentous step. And while you have great hopes for the future, you never know what may happen.
Consider the experience of a corporation I recently worked with. Two business partners had teamed up and incorporated their business and were now the two proud shareholders in a new corporation. Things started off fine as each partner respected his end of the bargain, fulfilling the roles and responsibilities he commitment himself to delivering for the corporation. But a few months in, one of the two shareholders died suddenly, leaving the other shareholder alone to run the business.
Now, the deceased shareholder’s’ estate has rights to the value or assets of the corporation. If If the surviving shareholder were to continue on and make the business a smashing success, he might find himself facing a legal battle for rights to the corporation’s assets from one of his former partner’s heirs. This could have resulted in years of litigation and thousands of dollars in legal fees.
What could the surviving shareholder do?
If a shareholders’ agreement had been drafted and signed, it would have included a clause specifically stating what would happen in the case that one of the shareholders passed away. The steps to take for the corporation in such an event would have been clear and the situation would have been and easier to resolve legally.
Keeping Your Corporation Out of the Legal Grey ZoneThere is a long list of things that can happen that may negatively impact your corporation, and you may not be be prepared for any of them.
What happens if a director or shareholder…
- Does not fulfil his or her responsibilities and live up to his or her commitments
- Wishes to leave the corporation?
- Commits fraud?
- Is negligent?
- Wants to sell his shares to family members?
- Goes bankrupt?
- Passes away?
The law is actually silent on these matters, and if they occur, you, your corporation, and its directors and shareholders are left in a legal grey zone. As a result, any of these events, and others, can lead to disputes or legal battles, which could take months, or even years, to resolve.
That’s why a shareholders’ agreement is absolutely crucial when you incorporate. A professionally drafted shareholder agreement is the best way to avoid future headaches. It helps you safeguard against the consequences of unplanned events and their impacts on directors and shareholders by setting down in writing what actions will be taken in varying circumstances. When unexpected events occur, many entrepreneurs have been saved by the terms of the shareholders agreement they made sure to sign at the outset.
Getting Your Shareholders’ Agreement RightA shareholders’ agreement should provide in clear terms, answers among other things, all of the following questions:
- What will the obligations of each of the shareholders be?
- What will happen if the corporation needs additional funding?
- What will happens in the event that one of the directors or shareholders passes away?
- What rules will be set down regarding the approval or and signing of contracts or paying expenses?
- In what circumstances will a shareholder be able to leave the corporation?
- How will decision be made and how will voting rights work (51%, 75%, or unanimous vote?)
- What salaries, if any, will be paid during periods of disability or illness?
- What rules shall be set in place preventing directors and shareholders from conflicts of interest?
- What rules should be put in place regarding or preventing the solicitation of any employee of the corporation for the purpose of hiring him or retaining his services, expect on behalf of the corporation?
- What rules should be outlined regarding confidentiality?
When launching a business, entrepreneurs can set their sights on growth, leaving formalities like a shareholders agreement on the back burner. Unless you take the time to get it done – and signed – at the beginning, it might simply be forgotten, and that could be a costly mistake.
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