Incorporation can give entrepreneurs a false sense of security. Business corporation laws provide a general structure, but are silent on many very important aspects for SMEs.
If you hold shares of a publicly traded company, your role is limited to holding a share of the company’s property. On the contrary, the shareholders of an SME are, most often, those who administer it and bring it to life. Shareholders are then assimilated into partners.
In this context, the shareholders’ agreement defines the function of the collaboration between the partners and considers various situations that could affect this operation. This contract can be compared to a marriage contract, a power-of-attorney, or a will.
At the operating level, the shareholders’ agreement generally addresses the contribution of each shareholder, their role and tasks, the decision-making process, etc.
Once the normal operation of the company is established, one can consider various situations which could come to disturb it.
For example, consider the disastrous consequences of the death of one of the shareholders. These consequences can be overcome by providing for the automatic repurchase of the shares at death and life insurance to finance this purchase.
Other clauses aim to settle the disagreements that may arise during the life of the company and thus avoid squandering the value of the company in unnecessary disputes.
It is also possible to provide rules that ensure that if a majority of shareholders wish to sell their shares to a third party, all are required to sell. This clause could prove extremely useful if you plan to later sell your business to an institutional investor.
Writing a good shareholder agreement requires a lot of attention. In addition, attention must be paid to the tax implications of certain clauses, particularly in the case of purchase-sale clauses.
A shareholder agreement can not guarantee against the occurrence of any litigation. However, it is a proven method of minimizing the risk of misunderstanding. And this can result in savings of several tens of thousands of dollars for each shareholder.