WHY DO I NEED A SHAREHOLDER’S AGREEMENT FOR MY CORPORATION?

Kanata CA personal injury, family, and real estate law firm

“I’ve been told I need a Shareholder’s Agreement – do you have a standard agreement I can use” is something we hear with frequency. It reflects an understanding by the client that a Shareholder’s Agreement is a “good thing”, but without an understanding of what that good thing is. Generally the response of legal counsel to this question is that there is no such thing as a “standard” Shareholder’s Agreement, let’s meet and talk. So what is it about Shareholder’s Agreements that are so valuable and why isn’t there a standard form, like a real estate agreement?

At a high level of abstraction, a Shareholder’s Agreement is a document that expresses the expectations of shareholders in respect of a corporation through legal obligations and rights. The task of the lawyer in preparing the Shareholder’s Agreement is threefold – discerning what the expectations are (and those expectations are often not fully formed) – providing counsel on the legal and tax implication on the various alternatives by which those expectations may be realized – and expressing those expectations in the form of contractual terms that bind the parties.

For example, shareholders in a narrowly held private corporation may have an expectation that on death the shares will be purchased. In the absence of a Shareholder’s Agreement, this expectation may not be realized. There is no statute or common law requiring or obligating a purchase. If the remaining shareholders are unwilling to agree to a purchase, the estate is left with the shares and a tax bill. Nothing of course prevents the parties from negotiating a purchase, but the relative bargaining power may have shifted in unpredictable ways, and planning opportunities, such as insurance funding, may have been missed. A Shareholder’s Agreement that addresses these expectations will reflect the parties prior expectations for fairness, and will create certainty. Legal counsel will discuss alternatives including the corporate purchase of the shares, purchase by the remaining shareholders, and hybrids including spousal rollovers, the tax implications under the alternatives to the estate and to the remaining shareholders, the use of insurance funding, payment terms, security and so forth.

In family held corporations, expectations for succession (how management is succeeded) and liquidation (how the shareholding interests are turned into cash) are particularly difficult and require unique and sometimes innovative solutions. A Shareholder’s Agreement is a valuable tool in estate planning for resolving how competing expectations for liquidation and succession are accommodated.

Connolly, Nichols, Allan & Snelling LLP is a law firm located in Kanata, Ontario serving clients in Ottawa, Ontario and have experience dealing with Shareholder’s Agreements for small and medium sized enterprises, including family held corporations, “partnership” corporations and venture and strategic investor capitalized technology corporations.

Topics: Ottawa business lawyers, Kanata business lawyers, shareholders agreement, shareholder agreement, shareholder’s agreement, corporate governance, business law, succession planning