A properly drafted and executed shareholder agreement is a legally enforceable contract.

A properly drafted and executed shareholder agreement is a legally enforceable contract.

It is effective as soon as signed and remains in force indefinitely.

Purpose

To record agreement on issues related to the organization.

An agreement can address a single issue or many issues.

Types of Agreements

Non-Unanimous Agreements

These agreements will address narrow issues and are used to create a block of shareholders that can present a common front at shareholder’s meetings.

Unanimous Agreements

These types of agreements are signed by all shareholders and represent all owners of the corporations.

The unanimous shareholder agreement is an extremely useful tool for shareholders in Small Corporation who wish to ensure that they will retain control of the company.

It is recommended to create unanimous agreement in the beginning of corporation’s existence.

Pledge Agreements

A pledge agreement can ban pledging of shares as security for debts or require that all pledges include an agreement by the creditor that, in the event of default on the loan, the shares will first be offered for sale to the corporation or the other shareholders at a certain price, with the proceeds being used to satisfy the debt.

Voting Agreement

A voting agreement may have a clause appointing one or more parties as proxies for others. A proxy is an instrument that entitles one person to vote on another’s behalf at a meeting.

Comprehensive Shareholder Agreement

Comprehensive shareholder agreements can include all or just some of the corporation’s shareholders but usually take the form of unanimous shareholder agreements. These agreements address different aspects of corporation’s affairs.

Bylaws

Agreement may have clause that sets out the rules for choosing the bylaws.

Share ownership

Agreement may have clause that sets out how the shareholders require the corporation’s shares to be allocated.

The clause will indicate the number and class of shares going to each shareholder and the purchase price of those shares.

Issuance of new shares

Pre-emptive rights clause and prior consent clauses are the most common clauses with regards to issuance of new shares.

A pre-emptive clause states that if the corporation wants to raise money by issuing and selling more shares, it must offer the new shares to existing shareholders before offering to anyone else, and each shareholder has the right to purchase enough shares to maintain the same percentage ownership of the corporation.

In a prior consent clause, the corporation is barred from issuing new shares unless it obtains the prior consent of the existing shareholders.

Transfer and sale of existing shares

Clause controlling the sale of existing shares may give existing shareholders the pre-emptive right to purchase the shares offered for sale by a fellow shareholder or may simply state that a sale can proceed only with the consent of others.

These clauses may include a pledge agreement, a clause regarding the disposal of a shareholder’s shares after death, or a clause requiring shareholders to sign prenuptial or marriage contracts protecting their shares from a division of assets on marriage breakdown.

Buy – Sell Agreements

Buy-sell agreements allow shareholder “A” to force shareholder “B’ to either buy A’s shares or sell his or her own shares to “A” at a pre-established price. This kind of agreement gives every shareholder the right to initiate the buy-sell mechanism.

Death, legal incapacity, or bankruptcy of a share holder

An agreement can have clauses designed to ensure the smooth running of the corporation on death, legal incapacity or bankruptcy of a shareholder.

Director

An agreement can be used to control the election, powers, remuneration and replacement of directors.

Officer

An agreement can set out rules for appointment, powers, remuneration and replacement of officers.

Financial issues

A unanimous agreement can dictate how certain financial issues are dealt with by the corporation.

Dispute resolution

An agreement can contain clauses for dispute resolution.

Lawyer’s reporting letter

It provides a comprehensive review of the work carried out by the lawyer. Following are the issues that can be discussed in a reporting letter.

Basic information

Searches performed

Shares

Directors

Officers

Meetings

Minute book and seal

Shareholder agreement

Enclosures

Account and trust statement

Disclaimer:

This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.

References:

The fundamentals of corporate law and procedure

By Mark Walma and Patricia McCann – Smith

Publisher: Edmond Montogomery Publications Limited, Toronto, Canada.