Do You Need a Shareholder Agreement?

Disclaimer: This article on what to include in your shareholder agreement is intended for the purposes of providing information only and is to be used only for the purposes of guidance. This article is not intended to be relied upon as the giving of legal advice and does not purport to be exhaustive.

After incorporating your business, You may think that the hard part is done. You may not want to spend money on unnecessary legal fees. However, one important document you should not overlook is a shareholder agreement.

This article will explain what a shareholder agreement is and why it is important to protect your shareholders’ interests. We will also discuss the different provisions you should consider in your agreement.

You have worked too hard in your business to not protect your interests. At Beeksma Law, we are active within the entrepreneur community (we are entrepreneurs, too!) and understand your needs. Book a call with us today to discuss your corporation’s needs. We would be happy to help you!

What is a shareholder agreement?

A shareholder agreement is a contract between a company’s shareholders. It sets forth their rights and obligations with respect to their ownership interests in the company. The agreement may also include also provisions, which we will outline below, governing the management and operation of the company.

A shareholder agreement must be in writing and signed by all shareholders in order to be valid. You must keep the signed copy and any amendments in your corporate minute book. (To learn more about what should be in your minute book, please see this article.)

Do I need a shareholder agreement?

While not legally required, we recommend a shareholder agreement if your company has more than one shareholder. A shareholder agreement can help avoid disputes between shareholders by setting clear rules and procedures for the management and operation of the company.

It is also important to have a shareholder agreement in place so that all shareholders know their rights and obligations concerning their ownership interests in the company.

You do not need a shareholder agreement if you are the sole shareholder or if you have a not-for-profit corporation.

Why do I need a shareholder agreement?

Many people do not think that they need a shareholder agreement. We can compare it to a marriage. At the beginning of a relationship, everything is perfect, and you are in a honeymoon period. However, arguments can arise over time, and your relationship can change.

Similarly, while everything may be running smoothly in your business at the moment, it is important to have a shareholder agreement in place to prepare you for any potential disputes that may arise down the road.

Think of a shareholder agreement as a form of insurance for your business. It will protect your interests and help keep the peace between shareholders if disagreements occur.

Shareholder agreements protect both majority and minority shareholders. Let’s outline how shareholders protect each group.

How Shareholder Agreements Protect Minority Shareholders

If you are a minority shareholder (meaning you own less than 50% of the shares), you may worry that majority shareholders may take advantage of you or push you out. A shareholder agreement can help protect your interests by including provisions that give you certain rights and protections, such as preventing some decisions unless there is a unanimous agreement.

For example, you may include a clause that all shareholders must approve any decision to issue more shares. This will prevent the majority shareholders from issuing more shares and diluting your ownership stake in the company.

Another example is a drag-along clause, which gives minority shareholders the right to sell their shares if the majority shareholder decides to sell their stake in the company. This ensures that you will not be left holding shares in a company that you do not want to be a part of.

How Shareholder Agreements Protect Majority Shareholders

The majority shareholder owns more than 50% of the company’s shares and is protected by a shareholder agreement. For example, when a majority shareholder wants to sell their shares and leave the company, they may include a clause in the shareholder agreement that requires the other shareholders to sell their shares as well (known as a tag-along clause).

How Shareholder Agreements Protect All Shareholders

Regardless of whether you are a minority or majority shareholder, there are some provisions that will protect all shareholders.

One common provision is the right of first refusal. This means that if a shareholder wants to sell their shares, they must first offer them to the other shareholders before selling them to a third party. This gives the other shareholders an opportunity to maintain their ownership stake in the company and avoid doing business with a stranger.

Your lawyer will also recommend a provision that determines how to resolve disputes. As we noted in this article, litigation can be expensive and time-consuming. Including a provision in your shareholder agreement that requires shareholders to mediate or arbitrate their disputes can help prevent the situation from escalating and costing the company time and money.

Finally, consider what will happen if a shareholder passes away. Those shares will become part of the deceased shareholder’s estate, unless otherwise stipulated in the shareholder agreement.

There are many different types of shareholder agreements, and the provisions you include will depend on your company’s needs. It is important that you seek legal advice to ensure that your agreement is tailored to your specific business and protects all shareholders involved.

Beeksma Law and Your Corporation

At Beeksma Law, we love supporting small businesses and corporations as they grow. We are active within many business communities and know how much you have put into making your business a success.

That is why we want to help you protect your business. We want to ensure you have the right shareholder agreement in place. Contact us today to schedule a consultation. We can determine what provisions to include and draft an agreement that meets your company’s needs.

We look forward to hearing from you!