Shareholders' Agreement Guide

Shareholders’ Agreement
For companies with more than one shareholder, a
shareholders’ agreement is vital. Without a
shareholders’ agreement, the following scenarios could
prove to be disastrous for a private corporation:
Deteriorating relationship between shareholders;
Shareholders wishing to sell their shares;
A shareholder suffering a life threatening illness or dying; or
A major disagreement on how the business is managed.
These scenarios illustrate the importance of establishing a set of ground rules to help deal with
acrimonious situations.
Although shareholders’ agreements will vary based on the various complexities that each business
faces, the following is a list of provisions which may be included in a typical shareholders’ agreement:
Significant Decisions
This provision will stipulate that significant decisions require shareholders’ approval. Significant
decisions may include a major change in company direction, the sale of the company etc.
Future purchase/sale/transfer of shares
This provision provides for the future sale of shares (i.e. consent of the shareholders/directors is
required for future issue of shares). It might also restrict who can become a shareholder in the
company.
A right of first refusal provision stipulates that a shareholder wishing to sell their shares must first
offer the shares to existing shareholders before selling them externally.
A shotgun clause” is an escape mechanism that shareholders can use in the event they cannot resolve
a serious dispute. In a “shotgun” arrangement one shareholder may offer to buy the shares of the other
shareholder for a stipulated price. The shareholder receiving the offer may either sell their shares at
that price, or buy the offering shareholder’s shares at that same price. This process aims to protect
both parties and encourages the shareholders to determine a fair price.
A shareholders’ agreement defines the duties and
obligations of shareholders in a private
corporation. This agreement should be thought of
as a set of ground rules which govern
shareholders’ behavior.
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