There are benefits and risks associated with starting up a business in BC. You want to ensure that your new business venture will run smoothly. A carefully drafted shareholders’ agreement can preserve benefits, minimize risks, and clarify how the business will operate.
What is a shareholders’ agreement?
A shareholders’ agreement is a contract signed by two or more shareholders of a corporation that governs rights, obligations, and relationships between shareholders. In the shareholders’ agreement, the shareholders can, for example, define the roles that each will play in the operation of the business, agree on how profits and costs will be shared, address how disputes will be resolved, and establish a process to follow if an existing shareholder leaves or a new investor buys in.
What is a unanimous shareholder agreement?
A unanimous shareholder agreement (“USA”) is a specific type of shareholders’ agreement that allows the shareholders to limit some or all of the duties and powers of the directors to manage the corporation. The USA shifts those duties and powers to the shareholders, which can offer certain protections for shareholders but also create significant liability implications. A unanimous shareholders’ agreement can only be modified by consent of all shareholders and subsequent purchasers and transferees of shares of the corporation will be bound by the terms of the USA.
When is the best time to enter a shareholder agreement?
For startups, it is highly recommended to enter a shareholders’ agreement as early as possible. The “honeymoon” stage at the beginning of a new business is the best time to come to an agreement that sets out rights and obligations, clarifies day-to-day operations, anticipates and provides flexibility for dealing with future events in the life of the corporation, and establishes ways to resolve potential disputes. It is a mistake to put off discussing crucial issues concerning the business. If you wait until conflict arises, it may be too late to come to an agreement, causing disruption in business operations and, in the worst case scenario, leading to costly litigation.
Why not to use a shareholder agreement template?
When incorporating a business, it can be tempting to reduce costs by using templates. There is no such thing as a “one size fits all” template and using one may end up costing more in the long run. Shareholders’ agreements are extremely valuable to longevity and smooth operation of a business. While many shareholders agreements for startups have elements in common, there are many reasons why not to use a shareholder agreement template. The benefits, risks, and objectives of the parties to the agreement will vary depending upon the situation. A shareholders’ agreement will provide effective protection, flexibility, and legal certainty if it is customized to fit the needs of the company and the unique concerns of its shareholders.