Starting a new business venture is a very exciting time. There are many decisions to be made, from naming the business to deciding whether or not to incorporate; getting things off the ground can be an exhilarating whirlwind. This exciting time can, however, cause distraction resulting in potential future pitfalls going unnoticed or disregarded. Factors such as death, divorce, or unforeseen financial hardships of a partner in a business venture are conceivable realities that if ignored can be devastating to a business’s future. In addition to life’s variables, partners in a venture should also be prepared for business disagreements. Anything from financial disputes to the daily running of the business can cause tension with the possibility of escalation. Having a shareholders agreement in place can help lessen the uncertainty in the above-mentioned situations and provide a clear method for how to solve an issue.
Unanimous Shareholders Agreement
A unanimous shareholders’ agreement (“USA”) is a contract to which all of a corporation’s shareholders are a party. There are four primary reasons USAs are an essential tool for almost any business.
- Allows shareholders to set the rules for the management and decision-making for the corporation.
- Provides a mechanism for resolving deadlocks and disputes between the shareholders.
- Able to provide a platform to establish specific rules regarding the liquidity and transfer of shares.
- They provide ground rules for unexpected personal situations like death, divorce, and disability.
USAs effectively restrict the traditional powers that the board of directors has when it comes to managing the company’s affairs. In turn, this gives that power back to the shareholders themselves. USAs can cover virtually any factors relating to the business and how it should be run, including anything from limitations on the issuance and/or transfer of shares to how shareholder disputes will be settled. Minority shareholders can also be protected through a USA by stating they maintain specific rights. Perhaps most importantly, USAs allow for provisions stating what decisions and/or situations require a majority approval of shareholders or unanimous approval. USAs have been compared to prenuptial agreements as they typically also provide mechanisms for how a shareholder may exit or be forced out of the corporation.
USAs can also provide clear resolutions when personal complications threaten to negatively impact a corporation. Divorce is an example of a personal occurrence that has the potential to affect a business. If a shareholder experiences a divorce, it’s possible their spouse will be entitled to a portion of the shares they own in the corporation. Similarly, in the event of the death of a shareholder, their shares would typically pass to their heirs according . Both of these situations have the potential to expand from personal hardship into quite a corporate mess as well. However, with a well-drafted USA shareholders are able to protect themselves and stipulate how these situations will be dealt with should they come to fruition.
Another protection available to shareholders through a USA pertains to shareholders leaving the country. This is important because if your business has then loses the Canadian Controlled Private Corporation status by a shareholder leaving the country, this will result in a higher tax burden for the corporation. A USA can provide for handling the shares should this situation occur.
It is always a good idea for a business of any stage to consider implementing a shareholders’ agreement if it hasn’t already. If your business doesn’t have a shareholders’ agreement or you think it needs updating, the lawyers at Aluvion Law can help you! Contact us today by emailing at info@aluvionlaw.com
