Shareholders’ agreement: Are you vulnerable to unforeseen events?

Generally, a shareholders’ agreement is based on three pillars: clauses relating to the purchase and sale of shares, clauses aimed at regulating behaviour between shareholders and finally clauses pertaining to the company’s administration.

Purchase and sale of shares – When a shareholder withdraws himself from a company, whether voluntarily, or not, regardless of the reason, whether it happens during his lifetime or upon his death, a good shareholder’s agreement should necessarily provide the appropriate mechanisms by which such withdrawal shall be made. More importantly, this type of clause will ensure a market for the sale of those shares, as it will provide guidelines or mechanisms to the shareholders, to evaluate the value of those shares. It will also specify to whom the shares may be sold. The purpose is to protect the remaining shareholder from being in a company with an unwanted third party. At the extreme limit, these clauses may also be useful to avoid judicial liquidation in the event of a deadlock within the company, which is the ultimate remedy provided for in the law.

Shareholder behaviour – These clauses are intended to regulate interactions between partners. Whether they foresee solutions to future conflicts, or ensure that shareholders do not undertake activities that compete with the company, a shareholder agreement must set out the obligations to which all shall subscribe. This will ultimately protect the company from adverse effects resulting from those conflicts. If a shareholder is also working for the company, such clauses should also be reflected in their employment contracts.

Administration – By default, a shareholder has little to no power in the administration of a corporation. For example, a shareholder may be entitled to profit sharing through the payment of dividends, but such dividends may only be declared by the board of directors. In this context, a shareholder would be well advised to include in the agreement, clauses that ensure that designated shareholders will also be selected to serve on the board of directors, or otherwise be granted veto rights. This is one of the ways for shareholders to ensure they shall have some authority over administrative decisions.

In conclusion, the strategic direction adopted by a company’s shareholders will indirectly be reflected in their agreement. Incidentally, all while basing himself on these three pillars, your legal advisor, will be able to suggest the right clauses for your situation. A great shareholder’s agreement must remain accessible, because ultimately, those shareholders are the ones who will be using it.

Me Jean-Philippe Ponce

Ponce Lawyer Inc.

This article does not constitute legal advice, to obtain a solution adapted to your needs, please consult a lawyer