So you have a business idea. Together, you and your partners have the knowledge and skills to complete your project. You decide to incorporate yourself and you agree on that you will divvy up shares. Your business lawyer has taken steps to establish your corporation. Are you completely protected? The answer is no. The Shareholder Agreement is an essential tool for your protection!

The Limits of the Protection of Constituent Laws

The Business Corporations Act and the Canada Business Corporations Act provide for the establishment of a basic structure for businesses. However, it must be taken into account that these laws apply to all joint stock companies, regardless of the number of shareholders, the turnover of the company, the number of employees or the nature of the goods or services offered by the company. It is understandable that in this context, the law cannot settle all the details.

In large, publicly traded companies, the role of shareholders is generally limited to owning the company’s property, through the shares they own. Few are involved in running the business itself.

The Protection of SME Shareholders

The case of SMEs is quite the opposite. Very often, those who own the shares are also the ones who make the decisions and do the work necessary to produce and sell the products or services offered by the company to its customers. As a result, SME shareholders often have similar relationships with each other.

To ensure more comprehensive protection, it is not enough to rely on the general rules of incorporation. You have to put in place a specialized contract called the shareholders’ agreement.

The Role of the Shareholders’ Agreement

The role of the shareholders’ agreement is to establish rules accepted by its signatories. There is general agreement on a number of issues concerning the ownership of the business and its closed nature. For example, rules can be set regarding the admission of new shareholders. These rules are very often aimed at protecting the balance between shareholders. Without these rules, a shareholder holding a majority of the shares may gradually become minority through the combined effect of the issuance of new shares and the sale of shares owned by other shareholders.

Most of the time, there are rules that come into play with the death of a shareholder. This death may, for example, trigger the sale of the deceased’s shares to the surviving shareholders or their repurchase by the company itself. This type of clause aims to protect the interests of both the surviving shareholders and the heirs of the deceased.

In some cases, some of the powers normally exercised by the directors will be transferred to the shareholders. We will then speak of a unanimous shareholders’ agreement. These unanimous agreements are subject to special rules. However, they have the effect of imposing themselves on any future shareholder.

Avoid Pitfalls with the Help of a Specialist

The drafting of a shareholders’ agreement could contain various pitfalls, which your lawyer specializing in business law will allow you to avoid. A well-written shareholder agreement will prove to be an essential part of your protection and the protection of the value of your investment.

Photo credit: photo by Sharon McCutcheon on Unsplash