Shareholder Agreement (Explained: All You Need To Know)

A shareholder agreement is a type of agreement between shareholders of a corporation, or business owners, where they mutually define the shareholders’ rights and obligations.

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What Is A Shareholder Agreement

A shareholder agreement is a type of contract between two or more shareholders of a corporation where the shareholders define their rights and obligations within a company.

A shareholder agreement can also be signed between a company and a shareholder.

Typically, a shareholder agreement is used to determine how to run the corporation, how to distribute dividends, elect members of the board, conduct meetings, and make decisions on important matters.

The main purpose of a shareholder agreement is to ensure that all shareholders understand their rights and obligations but also prevent potential disputes between the parties.

In Quebec, a shareholder agreement of a Quebec corporation will be subject to the Quebec incorporation laws whereas a Canadian corporation will be subject to the Canadian corporation laws.

Why Are Shareholder Agreements Important 

Shareholder agreements are important as they provide the legal framework between shareholders of a corporation.

When a corporation has two or more shareholders, it is generally a good idea to implement a shareholder agreement allowing the parties mutually agree on how they envisage managing their company and document their rights and obligations.

Corporations and businesses operate in rapidly changing environments.

The continually changing business environments may bring business owners to disagree or have different visions as to the future of the corporation.

Should there be a dispute, misunderstanding, or conflict, the shareholder agreement can help shareholders resolve a good number of common disputes.

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When To Implement A Shareholder Agreement

A shareholder agreement can be agreed upon and signed at any point in time in the life of a corporation.

However, the most optimal time to agree on the terms of a shareholder agreement is at the time of incorporation or shortly thereafter.

When the corporation has fewer shareholders and things are going well, it is easier and more likely that a shareholder agreement will be adopted.

However, as the number of shareholders increases and as disagreements or conflicts may start creeping up, it may be more difficult to agree on terms and conditions that make sense to everyone.

When the shareholders of a corporation agree on the terms and conditions of the shareholder agreement, conflicts and issues can be resolved based on the parameters that they have specifically defined.

In the absence of a shareholder agreement, provincial and federal laws will apply.

In that case, the parties will need to find statutory or legal foundations to support their claims or position and it may not be as simple as simply having a shareholder agreement in place.

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Shareholder Agreement Types

Fundamentally, there are two types of shareholder agreements in Quebec and Canada: the standard shareholder agreement and the unanimous shareholder agreement.

Standard Shareholder Agreement

The standard shareholder agreement is an agreement between specific shareholders of a corporation where different rights and obligations are defined.

For instance, you can have provisions governing how the members of the board are elected, how quorum will be achieved in different meetings, and procedural rules applicable to shareholder or board meetings.

The shareholder agreement can also cover aspects governing share ownership such as how shares are to be transferred, who can hold shares in the corporation, shareholder rights such as rights of first refusal, life insurance provisions, share valuation mechanism, and so on.

Unanimous Shareholder Agreement

A unanimous shareholder agreement is a type of agreement that is applicable to all the shareholders of the company.

Unlike the standard shareholder agreement that only binds the shareholders that have signed it, the unanimous shareholder agreement binds all shareholders and will bind future shareholders as well.

Typically, a unanimous shareholder agreement can cover the same aspects as a standard shareholder agreement but must be used to limit the powers of the board of directors or protect minority shareholders.

A unanimous shareholder agreement must be lawful, bind all shareholders of the corporation, and must restrict, in whole or in part, the authority of the board in favour of the shareholders.

In the province of Quebec and most Canadian provinces, except for BC, Nova Scotia, and PEI, corporations can adopt unanimous shareholder agreements.

In Quebec, you’ll need to disclose your unanimous shareholder agreement to Registraire des Entreprises du Quebec which is Quebec’s corporate registry.

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Takeaways 

So there you have it folks!

What is a shareholder agreement?

In a nutshell, a shareholder agreement is a legal contract between the shareholders of a corporation.

In the shareholder agreement, the shareholders define the limits and boundaries of their relationship as shareholders in the corporation.

Typically, shareholders will include non-compete, non-solicitation, intellectual property right provisions, define how the corporation is managed, and provide dispute resolution mechanics.

Although many consider adopting a shareholder agreement in the early stages of their corporation’s business operations, a shareholder agreement can be implemented at any time.

If you need legal support and advice in drafting a shareholder agreement or need to interpret one that is already in place, it’s best to consult a qualified corporate lawyer.

Good luck!

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