Shareholder Agreements: In Business Together

A “shareholder agreement” is an agreement among the owners of a company. What is the purpose of a shareholder agreement? When is it signed? And what can it include?

Why is a shareholder agreement important?

A shareholder agreement allows a company’s owners to establish rules regarding

• how decisions are made,
• future investments,
• the involvement of each owner in management of the company, and
• the circumstances in which one person can be required to sell their shares to the other shareholders.

Signing a shareholder agreement can limit what you’re allowed to do with your shares. However, your partners will also have limits. This can prevent them from acting against your interests, which reduces the risk of conflict.

When can you sign a shareholder agreement?

You can sign a shareholder agreement either before or after you go into business. You can also ask your partners to renegotiate an agreement when you buy shares of an existing company. Agreeing on the rules is easier when everything is running smoothly . . . as opposed to when conflicts arise.

What is included in a shareholder agreement?

The content of a shareholder agreement depends on the needs of the business partners. You can include various clauses, such as how decisions are made, conditions for joining the company, what to do if a partner dies or becomes incapacitated, and how disputes are settled.

Decision making

The shareholder agreement states how business decisions are made.

Most decisions in a company are made by the majority of the votes cast by the shareholders entitled to vote at a meeting. For example, this may be the case when some of the company owners want to exclude one owner. Some decisions must be approved by two-thirds of the votes cast, for example, moving the company’s head office or merging with another company.

If these rules are not suitable, your shareholder agreement can provide different ones. For example, a shareholder agreement could require that more than two-thirds of people must be in agreement for certain types of decisions.

Joining the business

You might want new people who join the company to meet certain conditions. A shareholder agreement can help with this. For example, you can decide together that company shares cannot be sold to someone who isn’t already a shareholder.

Provide for what happens in the event of death or incapacity

You can provide that certain situations, such as death, disability or incapacity, will automatically trigger the forced sale of this person’s shares. If the shareholder agreement doesn’t mention what to do in such situations, you might end up being in business with a former partner’s heirs or other family members.

Settle internal disputes

Your shareholder agreement can state that internal conflicts won’t be settled by going to court and that other methods will be used to maintain good relations among company owners. Mediation and arbitration, for example, are good options to consider. To learn more about these options, see our article Resolving a Conflict: Negotiation, Mediation and Arbitration. 

Anticipating certain situations

A shareholder agreement lets you decide in advance how certain problematic situations will be dealt with. Here are a few examples:

Competition or soliciting customers

The shareholder agreement can prohibit your business partners from competing with you or soliciting the customers of your business.

Appraisal in the event of a sale 

You can specify in advance how each share in the business will be appraised before the sale, for example, by having an independent expert carry out the appraisal.