Karen G. Shin September 15, 2010
This article provides information only, not legal advice. If you have a legal problem or need legal advice, contact us at firstname.lastname@example.org.
Who is this article for?
This article is intended for anyone who owns or will own shares in a private company. As the rules that apply to public companies are different, this articles does not apply to holders of shares of public corporations (i.e. shares of companies that are publicly traded).
Persons who will find this article most relevant are those who are shareholders of private companies, and are involved in the day-to-day management of the companies in their capacity as directors or officers, together with others. The key phrase being “with others”. Obviously, if all shares of the company is owned by one person (a.k.a. “sole shareholder”), and the intention is to keep it that way, a shareholders agreement will not be necessary.
Are you forgetting something?
What is often the case for a small incorporated business is that two or more individuals will become shareholders and work together to run the business. As the owner-managers get buried in the day-to-day management of the business, getting a shareholders agreement is generally the last thing on their mind. Between trying to run a business and trying to keep on top of the administrative tasks, it is quite understandable that things fall through the cracks. A shareholders agreement, after all, does not have an immediate consequence or benefit. That is, of course, until something happens and it is too late.
Why you need a shareholders agreement
Imagine this situation. Mike and Harry starts a car-wash station business. They get a company incorporated, and then sign a lease. The intention at the beginning is to make equal contribution, and therefore take equal share of the company. Mike and Harry each take 50% of all of the shares of the company. The business take a bit of time to get going. Mike and Harry each invest, by way of shareholder’s loan to the company, $10,000. After a while, the business is booming. Both were able to recover their loan to the Company, and are now taking handsome salary. Mike starts thinking about expansion. Mike wants to invest the profit back into the company and put in another automated car wash station. They will also need to sign a new lease for the space next to their current business premises. The landlord wants the major shareholders to sign as guarantors. Harry on the other hand wants to sell his shares. He has recently had trouble with his health, and feels that it’s time to slow down and spend more time with his family.
Things to think about
A host of problems arise from this simple scenario. The situation is further exacerbated by the fact that there are two shareholders with equal voting power, with the possibility of creating a potential deadlock.
How will Mike deal with the fact that Harry does not want to invest anymore money into the company? What if Harry does not want to sign the new lease as a guarantor because he wants out and does not wish to incur any more personal liability associated with the company? Should Mike take on the liability alone? To whom will Harry sell his shares? What if Harry wants to sell his shares to his brother who, in Mike’s opinion, is a complete pain in the neck? Should Harry be able to sell his shares to anyone he wants? On the other hand, is it fair to unduly restrict to whom Harry can sell his shares?
If you don’t have a shareholders agreement…
Without a shareholders agreement, it can be extremely difficult and expensive to resolve disagreements among shareholders. It is true that when a shareholders agreement is drafted, one should have in mind the worst case scenario. It is also true that the chances of the worst case scenario taking place is quite low. The point is, however, once you are prepared for the worst case scenario, you can deal with the less extreme circumstances when they arise. One must always keep in mind that there may be factors quite outside of one’s control. Death or deterioration of a shareholder, for instance, is rarely a forewarned event.
How to avoid costly litigation and disruption to business
Given the unexpected nature of life, it would be prudent to put in place a procedure to deal with such contingencies. Not only will it save time and money when those events take place, it will also prevent your business from taking a downfall. It is also important to get a shareholders agreement done at the beginning of the relationship, when the parties agree on their roles and expectations.
Come see Logos Law Office for your business.
A shareholders agreement is an important legal document which requires advice of competent business lawyer. Call us for an appointment. We will meet with you and create an agreement that clearly sets out the parties’ understanding of the relationship. If you are not sure what should be in the agreement, we encourage you to call us. We will review your situation, and advise you accordingly.
Logos Law Office is located in Burnaby, BC, and practices in the area of business law, commercial law, wills & estates law, and real estate law.