Properly Drafting Shareholder Agreements
The importance of proper shareholder agreement terms are observable in almost every shareholder dispute. There are a few reasons why people do get a shareholder agreement. Some include never seeing problems arising, the cost of drafting one, and simple recurring putting it off. There is no “kit” that is effective for all companies. Your shareholder terms should be unique and specific to your company. The Calgary, Alberta lawyers at Kahane Law Office can help you determine your needs. Call Now 403-225-8810.
Why So Many Shareholder Agreement Terms?
Clients often ask where the shareholder agreement, also referred to as an unanimous shareholders’ agreement, is so long. The start off preferring a three page document. We invite clients to go through the whole agreement with us and strike out the terms they do not feel are necessary. Once explained, very few terms are removed.
What Are The “Must Have” Shareholder Agreement Terms?
The following are some of the shareholder agreement terms that every company should have. Keep in mind that it is easier to initiate a shareholder agreement early on while there are fewer shareholders.
Raising funds & dealing with debt
There are times in most company’s growth where additional funds are required to grow. How those funds are raised can be vital to the company. Unless there is a shareholder agreement term to this effect, the company may not require shareholders to contribute additional capital into the corporation. The same is true of how the corporation deals with debt.
What rules will be followed for your companies board
These types of rules govern how meetings will take place. The bylaws set out many of these rules. These include quorum requirements and who will have a casting vote. A shareholder agreement can set these rules further so that they cannot be changed easily to protect the integrity of the board.
Who makes up the board & who makes decisions
Who makes up the board of directors is important. The board defines the direction that the company will take. The shareholders elect the board. As such, the shareholders have to trust that the board will make good choices. Shareholder agreement terms that establish who will make up the board are important. These agreements are also necessary to limit the powers of the board if shareholders prefer to keep certain decision making powers for themselves.
Agreements for founding shareholders who are also employees
There are good reasons, from a company’s perspective, that all founding shareholders and key employees enter into binding agreements with the company. The shareholder agreements terms can include this provision. These agreements protect intellectual property, solicitation of clients and employees of the company as well as preventing these people from competing with the company. If key employees become shareholders, then they would be required to become a party to the shareholder agreement terms. This additional level of security helps to protect the company.
Having a term restricting the transfer of shares is a key shareholder agreement term. There should also be this restriction as part of the shares structure. Restricting the transfer of shares means that a shareholder cannot transfer their shares to an individual that could be detrimental to the corporation. This includes people like competitors, hostile ex-spouses or random individuals who will not contribute.
Value of shares
The other side of sale of share provisions is determining the value of those shares. There are many ways of valuing shares. What is most important, as between shareholders, is having a consistent and easily determinable mechanism for valuating shares. Ideally this determination is made at the beginning when share values are easy to determining and all the parties are in a positive, collegial mind frame.
Sale of shares (Buy-Sell Clauses)
Buy Sell Clauses vary greatly. They can mandate the option for all shareholders to have equal rights to be a party to majority share sales. They can also provide provisions for shareholders to buy out other shareholders. The variety of these types of terms is so extensive that it is important to have a discussion with your corporate lawyer.
A shotgun clause is one that is used when one person wants out of the company or when one person wants to buy out another shareholder. It sets out how offers are made, the value, the consequences of refusal, etc. learn more about these powerful and valuable clauses that must be used with caution.
Policies regarding dividends
A shareholder agreement can set out the specific shareholder agreement terms as to when or if dividends will be issued. There are many shareholder disputes that arise from this decision. Further, so that all shareholders are treated evenly, regardless of the shareholder class shares they hold, the dividend policy can maintain fairness among all shareholders
Corporate promises to directors, officers & employees
There are certain expenses that are paid by the company but benefit certain people involved with running the company. For instance, maintaining error and omission insurance for the directors is not a requirement but is a benefit to the directors. Life insurance for people who are key to the growth of the company is another obligation that can be placed on the company by way of shareholder agreement terms. Other provisions include what directors are paid (if anything), employee non-disclosure agreements and the reimbursing of certain expenses.
Solving problems between shareholders
In an ideal world, no one has to go to court to solve problems. The process is time consuming and expensive. Dispute resolution is an option that can help avoid this. Mediation and arbitration can help save time and money. It can also keep a messy internal fight between shareholders less public. In order to require this alternative to court, it needs to be drafted as a shareholder agreement term.
Getting Help With Shareholder Agreement Terms In Calgary
Developing proper shareholder agreements terms is vital to any company’s long term success. Standardize agreements do not offer you the customized terms required for the variety of businesses that exist. Reasonable flat rates make getting an agreement right for you easy. We can be reached at 403-225-8810 locally in Calgary, Alberta or you can reach us toll-free at 1-877-225-8817 or email us directly here.