If I am involved in a corporation with other shareholders, should we have a Shareholders' Agreement?
If I am involved in a corporation with other shareholders, should we have a Shareholders’ Agreement?
Absolutely! Whether you are a minority or a majority shareholder in a private corporation, you need a Shareholders’ Agreement to help govern your relationship, provide a market for your shares and to avoid disputes among the shareholders and the costly law suits such disputes often create.
Unlike shares in a public corporation that trade on the stock exchanges, shares in a private corporation are not readily marketable. In fact, the Articles of Incorporation will usually restrict share transfers by requiring such transfer be first approved by the board of directors. A carefully drafted Shareholders’ Agreement will create a market for your shares by stipulating that the other shareholders or the corporation must purchase your shares at their fair market value on the occurrence of certain specified events which may include your withdrawal from active participation in the corporation due to the termination of your employment, your retirement or your death.
Shareholders’ Agreements quite typically provide provisions relating to the management of the corporation including a shareholder’s representation on the board of directors and restrictions on management decisions about fundamental changes to the structure of the corporation with shareholder approval. These provisions can protect minority shareholders from being adversely affected through reclassification of their shares, issuance of new shares or an amalgamation of the corporation.