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What is a Shareholders’ Agreement?

by Peter Cusimano
Lawyer - Barrister & Solicitor

Jurisdiction: Ontario (Canada)

In a small/medium sized business, usually the people who run the business (the directors) are also the owners of the business (the shareholders). As such, the co-operation of all the shareholders is crucial to ensure the success of the business. If there is disagreement between any of the shareholders that cannot be resolved amicably, the business may grind to a halt, unless the parties have a written agreement in place to deal with such issues.

Although the responsibility of making decisions for a corporation normally is with the directors of the corporation, the shareholders may wish that certain decision making powers be removed from the discretion of the directors and be given to all of the shareholders. In order to accomplish this, all of the shareholders and the corporation may enter into an agreement with each called a Shareholders’ Agreement.

A Shareholders’ Agreement will address certain issues to ensure the smooth operation of the corporation continues. Some of the issues covered in a Shareholders’ Agreement may include the following:

  1. Restrictions or controls regarding the operation of the business and other matters of the corporation
  2. Control of the corporation; election of directors
  3. Signing authority
  4. Decision making procedures; where shareholder approval required
  5. Financing and additional capital contributions to the corporation
  6. Issuance of new shares
  7. Ownership of shares
  8. Transfer of shares: procedure, right of first refusal, conditional on signing agreement
  9. Retirement, divorce, bankruptcy, incompetency, or death of a shareholder
  10. Insurance
  11. Non-competition
  12. Confidentiality
  13. Non-solicitation
  14. Dispute resolution between shareholders (arbitration and “shot-gun” clauses)

Every Shareholders’ Agreement will need to be carefully written to deal with the specifics of the business.

Although the law does not require that a corporation have a Shareholders’ Agreement, I recommend that you consider having a Shareholders’ Agreement put into place to avoid problems when disagreements arise.

If you want to consider having a Sharheolders’ Agreement for your corporation, please contact me.

About the author: Peter Cusimano practices Business Law in Toronto, Ontario, Canada. Visit Peter Cusimano’s online Business Law Resource Center for concise answers to many more frequently asked business law questions, and more at Law Office of Peter Cusimano. The information on this page is for discussion purposes only. It is by no means legal advice or even a statement of the law on this subject. Please do not rely on the accuracy or completeness of this information. Any question or concern elicited by the information on this page should be taken to a lawyer who will consider the facts of each case and the legal remedies available.