Expert Responses

It is wonderful that you and your family work well together as shareholders of a company. However, there may be a situation in the future, including a business dispute or death of a shareholder that requires a course of action that can be agreed upon now by all of the shareholders and documented in a shareholders’ agreement which would help to minimise any additional stress at that time.

A shareholders’ agreement is a contract between the shareholders and the company to establish the ongoing rights and responsibilities of the shareholders in the ownership and administration of the company.

The shareholders can decide on the content of their particular shareholders’ agreement, but it usually includes provisions on the following topics:

• Providing for loans from shareholders; how they are repaid etc.
   
• To protect or control what minority shareholders can do. For example, a shareholders agreement can provide that for certain specified decisions, a minority shareholder has to agree.
   
• Controls on who sits on the board of directors, in terms of the number of directors and which shareholder gets to nominate the prospective directors.
   
• Control over procedural matters such as written notice for meetings and quorum requirements.
   
• Rules for the liquidation of a shareholder’s interest in the event of a disagreement, disability or death (including buy-sell agreement for shares)
   
• Providing for life insurance on shareholders so the company has the funds necessary to buy shares from the deceased shareholder’s estate.
   
• Rules for resolving deadlocks (such as arbitration, mediation or appointing additional directors)
   
• This list is not exhaustive. Any issue of mutual concern to the shareholders of a company should be included in the agreement.

The process of preparing the shareholders’ agreement allows the identification of possible business risks and discussion on how to resolve each issue if it arose.

It is recommended that the shareholders’ agreement be drafted now at a time when you and your fellow shareholders have a good relationship and can be objective. If there is no shareholders’ agreement and a business dispute, death or disability of a shareholder occurs, the resolution at that time will likely be more difficult and the outcome may be detrimental to the operation of the business.