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Importance of a Shareholders’ Agreement
Taimoor Qureshi
June 1, 2023
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As part of a business venture either with family members; friends; or business associates, individuals often become shareholders in private holding companies. Although that is a great start, in order to protect their interests and to outline the roles / responsibilities of each shareholder, the Agreement is something that can come in very handy.
The Agreement not only outlines the ownership interests of each specific shareholder, but it can also be used to determine other vital items including but not limited to who gets paid dividends at which stage of the venture; whose shares take priority in the event of dissolution or liquidation of the corporation; which shareholder is responsible for providing certain expertise and/or services to the venture etc.
In addition to the above, the Agreement can also be utilized to outline buyout scenarios via provisions such as ‘shotgun’ and ‘put out’ clauses; right of first refusal; right of first offer etc.
While parties may feel comfortable going into a joint venture with each other because each shareholder brings certain expertise and/or resources as value to the venture, in the event of death of a shareholder their shares may be passing to their estate as part of their primary and/or secondary will. The recipient beneficiary of those shares from the deceased shareholder’s estate may not have the same expertise and/or access to resources that the deceased shareholder had and as such, having the beneficiary involved in the venture in the place of the deceased shareholder could put the rest of the shareholders in the venture at a substantial disadvantage. As such, the Agreement can include provisions that give the other shareholders rights to purchase the shares of the deceased shareholder at fair-market value on a pro-rata basis.
Furthermore, the Agreement can also be used to cover non-compete and non-solicitation situations in the event any of the shareholders decide to sell their shares in the venture.
These points mentioned above are just scratching the surface of some of the intricacies that can be dealt with as part of a Shareholders Agreement.
For more information about this topic or if you have any questions please do not hesitate to contact us at (905) 270-6660 or e-mail us at: Info@kormans.ca.
Taimoor’s practice areas include Commercial law; Commercial Leasing; Corporate law; Mortgages; Residential Real Estate; and Wills and Estates.Taimoor was called to the Bar of Ontario and joined Kormans LLP in January 2019.Prior to joining Kormans LLP, Taimoor articled and clerked for boutique law firms where his exposure to residential and commercial matters from beginning to end helped develop his knowledge and skills in the aforementioned areas of la.
Taimoor is a strong believer in efficient client communication and does his best to keep clients as up to date as possible along all steps of a transaction.In his spare time, Taimoor is an avid follower of all major sports and enjoying the outdoors during the summer months.
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