The Importance of Shareholder Agreements
While there is no legal requirement to have a shareholders agreement under law, any corporation with more than one shareholder is well advised to obtain one to safeguard against these five areas of concern. The reason for this is because of the five D’s: Death; Disability; Divorce; Divestment; and Dispute.
Death
If a shareholder dies, his or her shares form part of his or her estate which is then distributed to its beneficiaries upon probate. You are now doing business with your partner’s sister, spouse, grandchild, etc., – something you may not have initially intended and may not want.
Disability
What happens when a key shareholder falls ill and under terminal disability? What if he or she was a key part of the business? He or she is no longer able to act as a director or officer or contribute in any way – yet he or she will still be entitled to the distribution of profits each year. In some circumstances, it may not be perceived as fair for two shareholders to receive equal profits when one is actively working in the business for many years and the other is physically incapacitated.
Divorce
A voting shareholder suddenly files for divorce. His or her shares now become part of the net family property to be equalized upon divorce with his or her spouse. The shareholder’s ex-spouse get the shares in the divorce. You are now in business with the ex-spouse and not your old business partner. What if he or she was central to the business? What if you don’t have a good relationship with the spouse? How are you to run the business in light of this new shareholder? What if the ex-spouse has voting control and decides he or she wants to sell the business? Your livelihood is now at stake.
Divestment
What happens when one shareholder wants to sell his shares and leave the business? Can he sell his shares to anyone or does he have to offer to sell his shares to you first? What if he is the majority shareholder and gets an offer from a prospective purchaser who wants to purchase the business – will you be forced to sell your shares too? You thought your shares were safe in your hands to provide for you and your family but the actions of other shareholders or third parties can very much affect your shares and rights.
Dispute
What if you and the other shareholders get into a dispute about a fundamental issue of the business – how are these disputes resolved? Does one shareholder have a casting vote to tiebreak when there is a deadlock? Must you refer the matter out to private arbitration for a ruling?
All of these matters are dealt with in a shareholders agreement. Without a shareholders agreement, your investment may be at serious risk. You may not be able to control who the other shareholders are, who you are doing business with, and even whether you can continue to hold and vote with your shares.
Our team of tax and corporate lawyers can help. We have the knowledge and experience to be able to turn your mind to all of the complex issues involved in holding shares of a private corporation. We can assist you in protecting your investment which is very often your livelihood and single most important asset.
Contact one of our corporate lawyers today!
Case Law
Gordon et al. v. Gaby et al., [1966] SCR 527 – Shareholder Agreement Dispute re Purchasing Shares
AP Toldo Holding Corporation v. The Queen, 2013 TCC 416 – Shareholder Agreement Disputes and their Tax Consequences
**Disclaimer
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.
Kendal Steele