Legal Brief for September, 2010

Shareholder Agreements

When someone is thinking of starting a business one of the first issues he or she must consider is whether they want to go into business by themselves or with one or more partners.  There are pro's and con's to each model.  If the business requires a large amount of financing or specialized technical expertise, it often becomes essential to bring in partners who are able to supply the qualities that you may not have available from your own resources.  If you are setting your business in the form of a corporation, then you will be issuing shares to yourself and your partners.

In a situation where there are multiple shareholders, it is highly recommended that the people involved take the time to have their lawyer prepare what is known as a "shareholders agreement" (known officially in the Business Corporations Act of Alberta as a "Unanimous Shareholders Agreement").  The reasons for this are many.

At the start of a business, all of the partners will likely have the same vision for the future of the business.  However, circumstances can change and two or three years into the business, people's perceptions and priorities may change.  Rifts can start to develop between the founding members, and one shareholder may decide that he or she "wants out".  How do you determine the value of the shares at that point?  The departing shareholder is likely to want to maximize the value, while the remaining shareholder is undoubtedly going to have a different view.  A shareholders agreement signed at the start of their relationship would have contained a formula for how the price would be calculated.  It would be a simple, quick process.  Without a shareholders agreement spelling that out, the situation can deteriorate into escalating offers and counter-offers, along with much resentment, which may result in one person suing the other to try to resolve the situation.

Other issues can arise - such as what happens if one of the shareholders becomes disabled, or dies?  Or if one of them simply wants to retire early?  What happens if one shareholder wants to bring in new partners, and the other shareholder does not?  Or what if an outside party approaches and offers to buy out the majority shareholder (in a situation where the shareholdings are not equal)?  Does the minority shareholder have the right to be bought out at the same time?

These are all examples of real life situations that can come up in the life of a business corporation.  A shareholders agreement allows people to sit down at the start of their business life together and establish a framework to handle these and many other issues.  If or when they then arise in the future, no one has to spend any time or money on coming up with a solution - it has already been agreed upon in the shareholders agreement, and it is simply a matter of implementing what is in the document.  In the absence of a shareholders agreement, it is very possible for these sorts of situations to develop into the legal equivalent of an armed camp, with each side retaining their own lawyer and spending considerable amounts on legal fees as they inch towards some kind of resolution.

So, if you are incorporating a business, and your lawyer recommends that you get a shareholders agreement prepared as part of the initial set up, don't be too quick to dismiss the lawyer's suggestion in your rush to get going with your business.  It is likely that your lawyer has seen many examples of corporate relationships that have soured, and ended in the corporate equivalent of divorce court, much to the chagrin of all parties.  The old saying "an ounce of prevention is worth a pound of cure" applies in corporate matters as well as it does in so many other areas of our lives.