Fillable Printable Shareholders' Agreement Guide

Shareholders' Agreement Guide

Shareholders’ Agreement

For companies with more than one shareholder, a

shareholders’ agreement is vital. Without a

shareholders’ agreement, the following scenarios could

prove to be disastrous for a private corporation:

 Deteriorating relationship between shareholders;

 Shareholders wishing to sell their shares;

 A shareholder suffering a life threatening illness or dying; or

 A major disagreement on how the business is managed.

These scenarios illustrate the importance of establishing a set of ground rules to help deal with

acrimonious situations.

Although shareholders’ agreements will vary based on the various complexities that each business

faces, the following is a list of provisions which may be included in a typical shareholders’ agreement:

Significant Decisions

This provision will stipulate that significant decisions require shareholders’ approval. Significant

decisions may include a major change in company direction, the sale of the company etc.

Future purchase/sale/transfer of shares

 This provision provides for the future sale of shares (i.e. consent of the shareholders/directors is

required for future issue of shares). It might also restrict who can become a shareholder in the

company.

 A “right of first refusal” provision stipulates that a shareholder wishing to sell their shares must first

offer the shares to existing shareholders before selling them externally.

A “shotgun clause” is an escape mechanism that shareholders can use in the event they cannot resolve

a serious dispute. In a “shotgun” arrangement one shareholder may offer to buy the shares of the other

shareholder for a stipulated price. The shareholder receiving the offer may either sell their shares at

that price, or buy the offering shareholder’s shares at that same price. This process aims to protect

both parties and encourages the shareholders to determine a fair price.

A shareholders’ agreement defines the duties and

obligations of shareholders in a private

corporation. This agreement should be thought of

as a set of ground rules which govern

shareholders’ behavior.

Shareholders’ Agreement

The agreement may also include the rules regarding the transfer of shares which may be triggered by

the following events:

 death of a shareholder;

 marriage breakdown of a shareholder;

 bankruptcy/insolvency of a shareholder;

 disability of a shareholder; and

 retirement of a shareholder.

Finally, shareholders’ agreements often address the following:

 how shareholder/employee are to be compensated;

 how disputes are to be resolved (i.e. arbitration, mediation);

 how the business is to be valued; and

 how a buyout is to be implemented.

Although a shareholders’ agreement is a voluntary agreement, it is an essential tool in laying ground

rules for matters of significant impact to corporations. Please note that this article deals strictly with

privately held corporations. Public companies are regulated by the various securities regulations.

You should always consult a professional advisor before implementing a shareholder agreement.

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Revised 27/10/2011