Operating a business can be both exciting and time-consuming. When a company is incorporated there is much to accomplish, emotions are running high and people often forget to slow down and consider how they will deal with future complications in their business. Putting these decisions off can lead to a number of issues. We regularly assist clients who end up embroiled in litigation, usually as a result of a director not acting in the company’s best interests, oppressive conduct, breach of the articles or from a shareholder not complying with a shareholders’ agreement. Whatever the dispute may be, shareholders’ agreements, or the lack thereof, are often a focal point in litigation. A shareholders’ agreement is like a blueprint for your company, providing agreed upon solutions in times of uncertainty or material change.
A shareholders’ agreement can address a variety of matters that may arise in the course of your business, for example:
1. What happens if a shareholder dies?
- Common ways to resolve this issue include allowing the remaining shareholders to purchase the deceased’s shares or having each shareholder designate a beneficiary who will be gifted the deceased’s shares upon their death. Life insurance can be considered to fund the payout
2. How will important management decisions be made?
- What is considered an “important decision”?
- Will important decisions be decided by a majority vote of the directors? For example, if you were a 25% shareholder would you want the company to be able to be sold despite your disagreement?
3. What if the shareholders are not getting along?
- Is there an exit strategy for shareholders?
- A common exit strategy is to include a “shot gun” clause. A shot gun clause allows a party to force the other shareholders to either purchase that party’s shares or allow that party to purchase the other shareholders’ shares
The above are just a few examples to get you brainstorming about potential issues that will be better to address before your business is in full swing. Unfortunately, some issues are unavoidable and it’s important to know when the time has come to seek legal advice.
If you would like to discuss a shareholder dispute or whether a shareholders’ agreement is suitable for you and your company please contact Hobbs Giroday.