For a company with shareholders, the shareholder agreement is the document that outlines all the rights and responsibilities for everyone. Having an attorney create and/or review such a document is critical for identifying risks and clarifying responsibilities.
With no shareholder agreement in place, any shareholder is eligible to sell their shares to a third party outside of the company. This means such a transaction will only be subject to whatever approval requirements are laid out in the company’s articles. Case law in Canada has previously determined that these may not be able to block a share sale to an outside party.
In the event that the shareholders want to be able to protect against unwanted third party shareholders, such an agreement could include a right of first refusal, enabling existing shareholders to have the option to match a third party offer to purchase the shares from the selling shareholder themselves. Another common provision inside a shareholder agreement is designed to protect minority shareholders in the event that the majority shareholders want to sell their shares to a third party.
A shareholder’s agreement is an official agreement between some or all of the shareholders or stockholders of an individual corporation. This contract will establish the duties and powers of management and the board of directors. This is extremely beneficial when a corporation is closely held when only a few shareholders are participating. There are several common things typically accomplished by a shareholder’s agreement including:
- Giving existing shareholders the right to approve future shareholders.
- Establishing the number of people on the board of directors and their responsibilities.
- Naming the duties and rights of the officers and other management.
- Determining rights related to sale or issuance of shares.
- Determining what happens in the event of retirement, death or other departure of another shareholder.
- Generating options to sell or buy the shares.