Shareholders’ Agreement – Preparation of Contingency Plans

Incorporating your business can have many advantages, including the ability to raise capital by selling shares of the corporation. Whether you are operating with only a partner or selling shares to multiple shareholders, drafting a carefully considered shareholder agreement is essential to your corporation’s long-term success. Even if all shareholders currently have a good working relationship, having a thorough agreement in place allows you to weather any unexpected changes, grow your business, and prepare for life transitions. No matter the size of your storms, our team at MÉDICALOI can help you create a robust shareholders’ agreement that can act as a strong, effective legal tool that protects your corporation’s and its shareholders’ best interests.

How Does a Shareholders’ Agreement Work?

The purpose of a Shareholder’s Agreement is to govern the relationship between the various shareholders of a corporation – a sort of “rule book,” if you like.  Essentially, a Shareholder’s agreement should provide, in clear terms, answers to the following questions:

•   How will decisions regarding the management of the corporation be made?
•   How are tasks allocated between the Shareholders of the corporation?
•   Will certain decisions require a majority, special majority, or unanimous vote?
•   What is the contribution (monetary or in time)  of each shareholder?
•   Are shareholders entitled to pre-emptive rights or rights of first refusal?
•   What are the modalities associated with the “Shotgun” clause, if any?
•   What mechanisms are available for dispute resolution?
•   What rules govern the payment of shares in the event of death or incapacity of one of the shareholders?
•   What are the rules surrounding the withdrawal or expulsion of a Shareholder?
• What are the modalities associated with the purchase of shares by the corporation?
• What are the insurance policies in place on the lives of shareholders?

How Does Your Shareholders’ Agreement Impact Potential Sales and Transfers of Your Business?

As your corporation grows and gains value, it opens the doors to potential mergers and acquisitions. You do not want this valuable opportunity derailed due to disagreements among shareholders or a lack of clarity regarding how shares will be distributed or how relationships and tasks will be governed. A shareholders’ agreement should carefully describe how a corporate sale or transfer may occur, including the shareholders’ rights to vote on the transaction. If you are preparing to sell your business, it is essential to review your shareholders’ agreement with a knowledgeable attorney to verify whether it is up-to-date and adequately provides guidance for the steps you are about to undertake.

How Do Shareholders Withdraw From The Corporation?

Your agreement should contain provisions for handling the unexpected departure of a shareholder. Will your corporation buy back the individual’s shares, or can other shareholders purchase them? Or are the shares forfeited entirely? Another crucial element to consider is the methodology used to establish the fair market value of the shares. It may also be beneficial to include a clause that allows your business to force the withdrawal of a problematic shareholder under exceptional circumstances, such as criminal conviction or bankruptcy.

How Does A Shareholders’ Agreement Protect It’s Shareholders in the Event of a Death or Disability?

A shareholders’ agreement should be drafted with the intention to provide protection for your business in the event of unforeseen circumstances. A share redemption clause can stipulate what will happen to a shareholder’s shares in the event of death or incapacity and can no longer participate in the decision-making process. In addition to creating this plan, the corporation must determine a method of funding the redemption of these shares, should it become necessary. A life insurance policy taken out on the shareholder is one of the most common ways of financing redemptions. However, your legal advisor can help you explore which strategies are best suited to your circumstances.

Shareholders must also clearly understand the provisions of the share redemption clause and create their estate plans accordingly. For example, one of the ramifications of a redemption clause is that a shareholder cannot pass shares to their beneficiaries. Failure to align an estate plan with the terms of the shareholder agreement can create confusion and challenges for beneficiaries.

Why Carefully Determining a Decision-Making Procedure is Vital

Most corporations will have majority and minority shareholders, and specifying the dynamics between these parties is key when drafting a shareholders’s agreement. A corporation will need to consider how many votes each shareholder is allocated, the number of votes required to approve certain matters, and what constitutes a quorum for a shareholders’ meeting, among other issues. A properly constructed shareholder agreement not only allows for the fluid management of your corporation but protects the rights of all shareholders, regardless of their stake in the corporation.

Does Your Shareholders’ Agreement Adequately Handle Dispute Resolution?

In a perfect world, the terms of a shareholders’ agreement would entirely prevent disputes from occurring. While it is possible to mitigate any potential shareholder disagreements through careful planning, it is still necessary to carve out procedures for resolving disputes. For example, if the shareholders reach an impass on an issue, the agreement may give the deciding vote to a particular shareholder or allow the assistance of an outside arbitrator who can mediate the dispute. Looking to the future and planning for issues before they occur is the best practice for maintaining the healthy operation of the corporation.

How MÉDICALOI Can Assist You

Shareholders’ agreements are detailed, complex documents that control vital aspects of your business. At MÉDICALOI, our experienced lawyers have been serving the needs of Montreal healthcare professionals for over a decade, and we possess a detailed understanding of the issues and nuances a shareholders’ agreement must address. Whether you need to draft a new shareholders’ agreement or review or modify an existing agreement, our legal team can help you protect your corporation while providing opportunities for business development. To learn how we can create a shareholder agreement tailored to the unique needs of your business, contact our law firm today at (438) 805-5515 and schedule an in-depth evaluation.