Why Your Small Business Needs A Shareholders’ Agreement

If you’ve finally got your small business up and running, you’re probably focusing your attention on marketing and hiring new staff to manage growth.

There is, however, good rationale as to why your next step should be to sign a shareholders’ agreement.

What is a shareholders’ agreement?

A shareholders’ agreement is a private contract between the owners of a company that sets the company’s rules, as well as how each owner’s interests will be handled.

Does my Toronto small business really need a shareholders’ agreement?

Yes. And below are just five of many good reasons to have one.

#1. You want to prevent time-consuming and costly legal disputes.

It’s inevitable that disagreements will arise in a small business.

In fact, team or investor conflict has been listed as one of the top 20 reasons that startups fail.

Don’t let your small business turn into a casualty – or end up in deadlock or litigation.

Your shareholders’ agreement can put in place a process to deal with shareholder disputes in a fair and transparent manner.

And remember, the best time to enter into a shareholders’ agreement is when all the shareholders are in harmony early on, before conflict arises.

#2. You’re a minority shareholder and you want equal say on important issues.

The general rule of corporate governance is that the majority rules. It’s common for majority shareholders to make decisions that may not be in the minority shareholders’ interests.

A shareholders’ agreement can provide minority shareholders equal footing on important issues by requiring unanimous shareholder approval on specific items, such as, for example:

• Entering into loan agreements;
• Disposing of or acquiring substantial assets;
• Election of directors;
• Decisions to file for bankruptcy or dissolution; and
• Whether to start a significant lawsuit.

#3. You’re a majority shareholder and you want to ensure you can sell your interest.

As a majority shareholder, you may wish to exit the corporation and sell your shares to a third party. That third party may request that all the shares of the corporation be sold to complete the transaction.

A drag-along right in a shareholders’ agreement would prevent a minority shareholder from blocking the sale by forcing them to sell their shares to the buyer.

#4. You want the ability to restrict share transfers.

Your shareholders’ agreement can put restrictions on share transfers, such as unanimous shareholder approval before a shareholder can sell their shares, or at a minimum, the opportunity for the existing shareholders to buy those shares on the same terms before they are  transferred to a third party, which is known as the “right of first refusal.”

#5. You want to focus on growing your company.

Having a shareholders’ agreement helps to take the unpredictability out of your business. If you don’t have one in place before problems arise, internal disputes can make it nearly impossible to run your business..

Shareholders’ agreements are flexible private contracts that can be tailored by your business law lawyer to your business and individual shareholder needs. And it can also be amended later on with the consent of all or a specified majority of the parties involved.

Contact A Toronto Small Business Lawyer Today

Are you looking for small business legal advice?

Anton M. Katz, Barrister & Solicitor has 22 years of corporate law and commercial litigation experience.

Contact us today to book your free initial consultation.