What Is: Shareholders' Agreement in Ontario, Canada

In small and medium sized businesses, usually the people who run the business, technically known as the directors or Board of Directors, are also the owners of the business, technically known as the shareholders.

The co-operation of all the shareholders is crucial to ensure the success of the business.

If there is disagreement between any of the shareholders that cannot be resolved amicably, the business might grind to a halt, unless the parties have a written agreement in place to deal with such issues.

Although the responsibility of making decisions for a company normally is with the directors of the company, the shareholders may wish that certain decision making powers be removed from the discretion of the directors and be given to all of the shareholders.

In order to accomplish this, all of the shareholders and the company itself may enter into an agreement with each other called a Shareholders' Agreement.

In this video, I am going to share some general information about a Shareholders' Agreement for use by companies and their shareholders in the Province of Ontario.

This is based on my twenty plus years experience as a business lawyer in Ontario advising and preparing Shareholders' Agreements for small and medium sized companies.

A Shareholders' Agreement specifies how certain matters regarding the operation of the company are to be handled. And it also describes certain rights and obligations of the shareholders.

Commonly the company is also a party to that Shareholders' Agreement.

The issues typically addressed in a Shareholders' Agreement include the following three areas:

First:

1. Certain subject matters that will require a higher level of approval required before it is approved.

That could mean certain key decisions of the directors must also be approved by the shareholders before those decisions can take effect.

This is so that the shareholders have a voice in the operation of the company even if they only have a small percentage ownership.

Second:

2. Restrictions and obligations regarding share transfers including the following:

(a) restrictions on the transfer of shares to prevent other shareholders from suddenly selling their shares to a third-party without approval of the existing shareholders.

Thus ensuring continued harmony among the shareholders.

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(b) Rights of first refusal in favour of other shareholders. This is to give existing shareholders the right to buy shares of a selling shareholder before a third-party can buy the shares being sold.

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(c) Tag along rights, which means if one shareholder sells to a third party, can the others also force the third party to buy their own shares, also known as tag along.

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(d) Drag along rights, which means if most of the shareholders are selling out to a third party, can any hold-outs be forced to also sell their shares to the third party, also known as drag along.

And the Third area:

3. Generally other subjects covered by a Shareholders' Agreement such as the following:

(a) Financing of the corporation. For example, whether shareholders will be required to contribute initial or additional funding for the operations of the corporation.

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(b) Access to certain records by the directors and shareholders.

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(c) Requirement to hold directors or shareholders meetings on a specified schedule, for example, quarterly.

So there you have it.

That's just an overview of a Shareholders' Agreement.

There is usually a lot more detail.

Every Shareholders' Agreement will need to be carefully written to deal with the specifics of the business.