When you own a business, planning for the future and protecting shareholder interests is extremely important. In Alberta’s competitive business landscape, making sure your business is equipped with clear governance and dispute-resolution mechanisms is key to upholding these values. While many businesses choose to focus on their operations and growth in this respect, a well-drafted shareholder agreement (SHA) is also a great way to contribute to long-term stability.
At Verhaeghe Law, our experienced Edmonton business lawyers can provide tailored legal advice to you and major stakeholders in your business. If you have questions about shareholder agreements or you would like to draft one for your business, our legal team can help. Contact us today to discuss your situation.
What is a Shareholder Agreement (SHA)?
A shareholder agreement is a legally binding written arrangement among the shareholders of a business that outlines how the corporation will be run and how shareholder interests will be protected. It is meant to outline rights, obligations, and dispute resolution methods to prevent conflict from occurring in the future.
No law or statutory requirement makes SHAs mandatory. However, to be legally enforceable, it must be in writing, witnessed, and signed by all involved parties. If you do decide to implement an SHA for your business, it may override certain statutory provisions under the Business Corporations Act (or the Canada Business Corporations Act for any federal entities).
Key components of many standards SHAs include:
- Governance and Decision-Making: Many SHAs will include provisions for how business decisions will be made and who holds authority over such decisions. For example, it may outline voting thresholds or majority vs. unanimous decisions for shareholders.
- Adding and Leaving Shareholders: Some SHAs will also explain the rules for admitting new shareholders to the company. They might also stipulate conditions or processes for when shareholders want to exit the company, including how their portion of shares will be handled.
- Management Compensation & Returns on Investment: An SHA can also outline how managers at the company will be compensated and how shareholder investments are expected to yield returns.
It is important to note that a shareholder agreement is different from articles of incorporation. Shareholder agreements specifically outline the relationship and responsibilities that shareholders have within the company. By contrast, articles of incorporation apply to your company as a whole and are meant to ensure that your business abides by all applicable laws and regulations.
The Benefits of a Shareholder Agreement
Shareholder agreements can be a vital part of a business’s health and integrity when there is more than one owner. Because they are not legally mandated, they are completely customizable to the needs of your shareholders, and your business. They are important for creating appropriate checks and balances and implementing effective problem-solving mechanisms. By working with a business lawyer, you can draft an agreement that protects your company’s best interests.
Some of the main benefits of SHAs include:
Investor and Shareholder Protection
Shareholder agreements can reassure external investors about the assets they have apportioned to the business. This is because they normally provide clear rules about compensation and serve to reduce potential conflicts.
For example, SHAs are valuable for mitigating control issues. They help to prevent scenarios where majority shareholders might unilaterally make decisions that negatively impact minority shareholders. In addition, you are also able to address the fair pricing of shares in your SHA, especially when the shares are sold.
Structured Decision-Making
Many SHAs set out voting requirements and expectations for shareholders. They can detail different voting thresholds for each type of decision, such as:
- Simple majorities
- Special majorities
- Unanimous decisions
- And more
This ensures that there is balanced control between shareholders across the business.
Restrictions on Share Transfers
Shareholder agreements can also help prevent unwanted changes in ownership. For example, certain provisions can be included that restrict who is eligible to become a shareholder. This can prevent third parties from inheriting shares upon a shareholder’s death or exit.
In addition, SHA buy-out clauses can give the remaining shareholders of the business control over the entry of new partners. Both types of restrictions create greater stability for the company in terms of control and possession.
Financing and Exit Strategies
SHA funding arrangements can specify the process for capital contributions by investors or shareholders. This might include provisions for preferential interest rates or conditions for personal guarantees.
Exit clauses can introduce exit strategies for shareholders, such as:
- Shot-gun clauses
- Drag-along
- Piggy-back clauses
- And more
These can help your business facilitate smoother transitions if a shareholder wishes to relinquish their role in the company.
There is no one-size-fits-all answer to whether these terms or clauses should be included in your SHA. Each agreement will depend on the structure of the business, the number of shareholders, their division of ownership, and individual financial resources. However, having each option available to you through an SHA can help you better protect your business based on its unique needs.
Cost-Effective Dispute Resolution
A large appeal of a shareholder agreement is its ability to set out thorough conflict resolution mechanisms. Such mechanisms allow businesses to avoid messy control issues by ensuring that shareholders are treated fairly and that their rights, responsibilities, and obligations are clear and legally enforceable.
For instance, many SHAs include requirements for mediation or arbitration before parties resort to litigation. Dispute resolution provisions often help companies avoid costly legal battles and lengthy negotiations when conflict does arise.
Drafting a Shareholder Agreement? Contact Our Edmonton Business Lawyers Today
At Verhaeghe Law, our Edmonton business lawyers have years of experience drafting comprehensive, legally enforceable shareholder agreements for our clients. We understand that every business is unique, which is why our lawyers will work collaboratively with you to draft an agreement that reflects your company’s specific needs and long-term goals.
A properly structured SHA not only helps prevent conflict but also supports seamless business operations and continuity during company transitions. If you have a business and wish to draft, review, or update your shareholder agreement, schedule a consultation with our legal team at Verhaeghe Law today.