Best time to draft shareholders’ agreement is during incorporation
Timing is of the essence when it comes to drafting a shareholders’ agreement as deferring it may later put a corporation at risk of uncertain and costly litigation, Toronto business lawyer Anton Katz tells AdvocateDaily.com.
He advises clients to have a shareholders’ agreement drafted at the same time they are incorporating their business — while things are fresh and before issues can emerge.
“On the day you incorporate, you can contemporaneously execute your shareholders’ agreement as a package deal,” says Katz, principal of Anton M. Katz Barrister & Solicitor. “The benefit of doing it this way is that you go through the checklist: What are the fundamental decisions partners need to agree on? What happens if a partner wants to exit the corporation either voluntarily or involuntarily.
“You come to that agreement and then you incorporate. It’s really the best time,” he adds.
If you defer drafting a shareholders agreement, Katz says there is no legal obligation for anyone to agree to one after incorporation.
“People can be as unreasonable or as busy as they wish to be. No court can compel the parties to enter into a shareholders’ agreement,” he says.
“Sometimes a client will say, ‘Let’s just incorporate now and we’ll do the agreement later.’ The danger of deferring a shareholders’ agreement is that it may mean that you never get around to it,” Katz says. “Conversely, you may want to draft an agreement, but another shareholder isn’t willing to do so or everybody wants to do it but can’t agree on the terms.”
If any of those scenarios happen, a corporation may have to resort to the courts to fashion remedies, which can be an uncertain and expensive undertaking.
“Shareholders, typically minority shareholders, who feel that their interests are being unfairly disregarded can make an argument to a court that they are been oppressed, relying on the oppression remedy provision contained in either the Ontario Business Corporations Act or the Canada Business Corporations Act,” Katz says.
“A well-drafted shareholders’ agreement can provide the necessary roadmap, preferably at the beginning of the trip.,” he says. “It will enable you to navigate
through conflict and have a codification of how to resolve disputes or what happens if certain issues unfold.”
Katz says if a company is a start-up, they may defer drafting a shareholders’ agreement to save money.
“A start-up may sometimes have very limited resources but then, lo and behold, the company becomes very profitable. All of a sudden, there’s a lot of skin in the game and no one can agree on what to do,” he says.
