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Does Your Business need a Shareholders’ Agreement?

Maybe you and some family members have purchased a rental property together. Maybe you and a friend have decided to open up a hobby business, a restaurant, or a retail store. You have looked at the pros and cons of different business structures (which is a topic that deserves its own article), and chosen to operate as a corporation.

 

There may be different expectations of each shareholder. Some may have contributed money but do not  expect to become involved in operations. Or some might be family members who own shares simply to help create some tax savings. The more shareholders you have in the business, the more chances you have for something to go wrong.

 

A Shareholders’ Agreement is a document which can plan ahead for the business. When I help clients prepare a Shareholders’ Agreement, here are a few of the topics we talk about:

 

Can one of the partners sell her shares to an outside buyer? Should the existing shareholders have the chance to match the offer? If the remaining shareholders don’t want to work with the new buyer, can they force the buyer to purchase the entire corporation?

 

Nobody wants to be stuck in a stalemate during disagreements. If the disagreement cannot be solved, can a shareholder be forced to sell their shares? If someone wants to exit the company, can they force other shareholders to buy their shares? Who chooses the selling price? What if one shareholder is willing to pay a premium price to buy out the other one?

 

In the event of a divorce, separation or bankruptcy, ownership of shares may suddenly change. Should the divorcing partner be forced to sell other assets first, if possible? Can the remaining shareholders buy-out the shares before a bankruptcy takes effect?

 

What happens when one of the main operators dies? Should the spouse inherit the shares and continue to help run the business? Or should the corporation buy life insurance so that the deceased’s family members are bought out of the business at fair market value? What if someone becomes unable to work due to a disability or injury?

 

Can any shareholder operate a similar business at the same time? What if the business has an opportunity to purchase another building or franchise at a discount rate, but some shareholders don’t want to become involved in the second location?

 

What if there are other disagreements? Should arbitration be used so that you keep business secrets out of a public courtroom?

 

These situations, and others, can be covered in advance with a Shareholders’ Agreement. This document lets all shareholders agree on these topics now, so that they do not become the subject of hurt feelings and court battles later on. It can help ensure your control of your company stays within the network that you choose, and prevent you from suddenly becoming partners with someone you never chose to work with.

 

A lawyer can help you plan for and prevent the ‘worst case scenario’ so you can stop worrying, and start preparing for the growth of your corporation.

 

Robert Lanteigne is a lawyer with Giesbrecht, Griffin, Funk & Irvine LLP.  A version of this article appeared in the New Hamburg Independent on Wednesday, November 2, 2016.

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