Asking if you need a shareholders’ agreement is like asking if you should get a prenup* - Of course you do.
Just like in a marriage you have to address these points:
What happens if my partner dies?
What happens if my partner doesn’t want to be my partner anymore?
What happens if I want to kick out my partner?
What if my partner wants to bring a new partner in?
What if someone else wants my partner and my marriage?
What if I want to end things?
That’s why a shareholders’ agreement is a must.
A business venture, just like a marriage, might fail and it can be costly, long and painful.
So let’s start. What if your partner dies?
Did you know the heirs inherit your partner’s shares and they have a say in how you can manage the company afterwards. Would you have the funds to buy back those shares? You might consider getting a life-insurance policy, which the company would be the beneficiary of in order to pay.
What if your partner decides if he wants out?
Without a shareholders’ agreement, your partner could decide to sell his/her shares to any third party without your approval. You could literally end up with a business partner you did not agree to work with just because someone was willing to buy the shares. With a shareholders’ agreement, a clause on the restriction on transfer of shares would insure your partner asks you to buy the shares first.
What if you want to kick out your partner or what if you want to end the partnership?
Ever heard of a shotgun provision? It’s for these types of events. This provision allows a shareholder to redeem the shares of his partner or sell his shares to his partner. For example, in the event that you offered to purchase your partner’s shares and the latter refuses, he will be forced to purchase your shares at the same conditions and price than the original offer you had made for his shares.
Here are a few examples: Paul wants to buy Laura’s shares in their company. Laura says no. Laura must now buy the shares of Paul at the price Paul had offered to buy her shares.
Paul offers to sell his shares to Laura. Laura says no. Laura must now sell her shares that she owns in their company to Paul at the price Paul offered to sell his.
What if a third party wants to buy your partner’s shares and you no longer want to be involved?
A tag-along clause would require that the buyer must acquire your shares as well at the same terms so you will not be “cut out of the deal”.
A drag-along clause would allow the majority shareholder who wishes to sell his shares to a third-party to force the minority shareholder to sell his shares at the same terms.
Be careful, if you actually wish to remain part of the company and you’re a minority shareholder, you would not like that provision. This is major for a majority shareholder who wants to sell the business because, without this provision, a minority shareholder can ruin a good opportunity. Negotiate accordingly.
Just like a marriage, money is always an issue so make sure to diligently evaluate the value of the shares when it comes to buying or selling them.
We hope you got it by now, a shareholders’ agreement is a big deal. Even if it’s just the two of you or the ten of you, the honeymoon can quickly end.
As usual, you can count on us to provide you with a tailored agreement so things run smoothly at all times.
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*Please note, a prenuptial agreement is not valid in Quebec; the term was only used for the context.