What Happens When There Is No Shareholders Agreement?

What are Shareholders’ Agreements? 

Many people starting businesses want to establish a fair relationship between shareholders. Some business owners rely on their Articles of Incorporation and provincial bylaws, while others use shareholders’ agreements. You can think of Articles of Incorporation as the basic coverage that the Canada Business Corporations Act requires. Articles of Incorporation list the classes of shares, if more than one, and the rights and obligations attached to each class. Beyond that basic coverage, most corporations seek additional protection from shareholders’ agreements for the following:

• Governance, management, and control;

• Dispute resolution;

• Pre-emptive rights;

• Restrictions on transfers;

• Borrowing money; 

• Non-competition and non-solicitation;

• Death of a shareholder;

• Participation of shareholders.

Shareholders’ agreements are private written contracts that company shareholders sign which detail the control and management of the corporation and the termination of the relationship of the shareholders. Depending on your circumstances, you may want a standard or unanimous agreement. Standard shareholders’ agreements are more flexible because you can amend the agreement without all the shareholders consenting. Unanimous shareholders’ agreements require the consent of all shareholders for amendments including the original signatories and all new shareholders. 

Benefits

The benefit of the agreement is that you can tailor it to make it fit your corporation’s needs. What are your rights and obligations regarding the corporation? What contributions did you make? For example, if you are a minority shareholder concerned about your vote, you can use the document to protect your minority vote. You and the other shareholders can use the agreement to be proactive about how you will resolve disputes, saving you time and energy later. If your dispute does end up in court, the existence of the agreement and its terms can safeguard you. As per Hurley v. Slate Ventures Inc., the court resolves disputes within the terms of the agreement. So, use the agreement to clarify your shareholder intentions and expectations. 

Shortcomings

The major downsides to shareholders’ agreements are cost and contention. You and the other shareholders might be negotiating forever without result. Maybe the shareholders have different objectives. Maybe the shareholders are so numerable that you cannot come to a compromise. Maybe it just isn’t worth the time negotiating. If that’s the case, your legal counsel may advise you not to create a shareholders’ agreement. 

What happens with no shareholders’ agreement?

For one reason or another, you might not have an agreement. Don’t worry. Shareholders Agreements are optional. However, legal counsel will typically advise you that, if you have more than one shareholder with an interest in your corporation, then you should use a shareholders’ agreement. Doing so gives you structured control to govern your corporation. Without the agreement, you expose your corporation to a host of potential issues.

Issues that may arise without an agreement

• Non-defined relationship for shareholders

• Increased risk of conflict 

• Lack of control and certainty of the outcome of the conflict 

• Deadlocked decision-making 

• Competition by shareholders that left the corporation to join a competitor   

Is a shareholder agreement necessary?

While shareholders’ agreements are not necessary, they are encouraged. Whether your circumstances be a joint venture, a majority and minority shareholder, two 50/50 shareholders, a private equity firm investment in a corporation, or a large group of shareholders with equal or unequal shareholdings, the agreement can benefit you.

So, to determine how a shareholders’ agreement would best serve you and your corporation, book a free consultation with us at Britannia Law.