Corporations are owned by shareholders, and it is the shareholders who make the decisions for the corporation.
Some examples of the decisions shareholders make are:
- who should be on the board of directors;
- who should be the president of the corporation;
- should the corporation make a major purchase; or
- should the corporation sell shares or allow a new shareholder to buy shares.
A corporation is treated like a democracy and whatever majority of the shareholders vote, is the decision of the corporation.
But what happens when a majority number of shareholders can not come to a decision?
If the shareholders can not agree then the shareholders can end up in court arguing their position to a judge who will then make the decision for the shareholders. Court is by no means an ideal outcome as it is often slow and expensive, which damages the corporation and the trust of the shareholders. Often the corporation is sold at this point as the shareholders are unable to continue to work together.
To avoid this scenario, our office recommends that shareholders agree to have a Unanimous Shareholders Agreement (USA) drafted. A USA is a contract signed by all shareholders that dictates the rules and regulations that shareholders must follow.
A USA ensures that in the event that the shareholders can not agree there is a mechanism in place for a decision to be made and binding on all parties.
Below are a few common clauses found in a USA:
“Shot-gun” Buy Sell Clause
A Shot-gun Clause sets rules on how a shareholder can place an offer on another shareholder’s shares. If this clause is activated the Offeror makes an offer that the Offeree can either accept or counter by offering to buy the Offeror’s shares at the same price. The goal of this clause is to ensure that if one shareholder wishes to leave the business they can, but only by buying or selling their shares at a fair price.
Right of First Refusal
If someone offers to buy a shareholder’s shares another shareholder has the right to match that offer and buy the shares instead at the same price.
Death of a Shareholder Clause
One of the most uncertain times for a corporation is when a shareholder passes away. To avoid the turbulence of the death of a shareholder many USA’s set out rules for what is to happen. Often the USA states the shareholder’s estate must sell their shares upon the death of the shareholder.
Share Valuation Clause
One of the most fought over issues between shareholders is the price of shares of the corporation when being sold or bought. To avoid this fight USAs often contain a clause that dictates how the shares will be valued often using the corporation’s accountant or some other professional.
Morality Clause
Some USAs provide a set of rules that shareholders must follow. These rules often stem from ensuring that the shareholder’s actions or reputation do not damage the corporation. For example, if a shareholder is arrested or has an addiction that is interfering with their role at the corporation.
By agreeing to the outcome while all parties are getting along it limits the damage of disagreements between shareholders.
By clearly defining the rights, responsibilities and exit options for all shareholders it ensures all parties are aligned when things are going well, but also when challenges arise.
If you have further questions or concerns regarding USAs or wish to have one drafted for your corporation our lawyers can help. Contact our office and our lawyers would be happy to assist you.
