Shareholders' Agreements - Overview

This section indicated by the Navigation Bar to the left entitled "Shareholders' Agreements" deals with considerations for a Shareholders' Agreement. A Shareholders' Agreement is an agreement between all shareholders of the Company (and often the Company itself) regarding various matters concerning the Company. A Shareholders' Agreement may include:

• provisions compelling shareholders to make future advances of monies to the Company, if necessary and to provide their personal guarantees of the Company's indebtedness (it may become problematic, for example, if one of the shareholders refuses to give a personal guarantee);

• other restrictions placed on share transfers in addition to those set out in the Articles of the Company; typically, the Articles provide that if a shareholder wishes to sell any of his/her/its shares he/she/it must first offer them to the other shareholders in proportion to the other shareholders' shareholdings in the Company and that only if the other shareholders decline can such shareholder sell his/her/its shares to an outsider;

• any matters which require unanimous approval of the directors and shareholders (for example, expenditures in excess of a specific amount, sale of assets of the Company worth more than a specific amount);

• circumstances, if any, in which shareholders are entitled to pledge or otherwise give their shares as security;

• provisions regarding share sale on death or incapacity of a shareholder or upon a shareholder ceasing to be actively involved in the business of the Company; regarding share sale on death, consideration should be given as to whether the buyout is to be funded by life insurance;

• provisions regarding how the business is to be managed, allocation of responsibilities, etc.;

• compulsory buyout ("shotgun") provisions;

• in the event of a buyout, how the value of the Company is to be determined.

It may be that at the time of incorporation of a business, the shareholders are in agreement about these matters, however, as time goes by, that may not continue to be the case. Therefore, it is important to enter into a Shareholders' Agreement at the outset. Although there will be additional costs incurred as a result of preparation of a Shareholders' Agreement, this cost likely will be substantially less than the cost of having to resolve a dispute at a later time if there is no Shareholders' Agreement in place. Click here to review a checklist of considerations or please contact us if you would like more information about Shareholders' Agreements and/or wish us to prepare a draft form of Shareholders' Agreement for your consideration.