What Is a Shareholder Agreement?

A Shareholder Agreement is a contract between all or some of the shareholders of a company, that details and defines certain rights and obligations of those specific shareholders who have entered into the agreement.

Shareholder agreements are only used in situations where there is more than one shareholder of a company. Generally, where multiple individuals wish to start or continue operating a corporation together as partners, a shareholder agreement is recommended to protect all parties involved.

What do Shareholder Agreements do?

There are different kinds of shareholder agreements. Depending on what rights and obligations each shareholder wants to address and/or protect, will dictate what form of shareholder agreement should be used. Typical issues addressed in a shareholder agreement are as follows:

  1. When can a shareholder sell his or her shares?;
  2. What happens to the shares of a shareholder who passes away or becomes disabled?;
  3. What happens if one of the shareholders wishes to buy-out the remaining shareholder/s?;
  4. What decisions can shareholders make with respect to the operation of the business and appointment of officers and directors?; and
  5. Whether there are any non-competition/non-solicitation restrictions.

A well throughout shareholder agreement can protect shareholders of a corporation in instances where there is disagreement or when one or more of the shareholders wish to exit the business.

Where there is no shareholder agreement, the rights and obligations of the shareholders fall within the applicable provincial or federal legislation. That is, Ontario provincially incorporated companies are subject to the Ontario Business Corporations Act, while Federally incorporated companies are subject to the Canada Business Corporations Act.  The rights of shareholders as defined within either piece of legislation, are far less comprehensive and protective then those rights typically found in a shareholder agreement.

We can assist with the preparation and/or review of shareholder agreements.