Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning shareholder agreement, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto business lawyers registered on the website who can answer your questions or help you with your shareholders agreement.
A shareholders agreement is an agreement between the shareholders (and which may even include the corporation as a party) to fix and determine between themselves certain of their respective interests, obligations, liabilities and ownership in the corporation and to record their agreement as to the manner in which certain of the affairs of the corporation shall be conducted.
Typically, a shareholders agreement will deal with things related to shareholders voting or transferring their shares. The following provisions are common to restrict or otherwise control how shares can be transferred:
- Restrictions on Share Transfers (generally): These provisions provide that no sale, transfer, assignment, disposition or issue of shares of the corporation at any time to any person is valid and binding unless it is done through one or more of the share transfer provisions of the shareholders agreement.
- Consent Sale: The simplest exit mechanism is to allow a party to transfer its units/shares after obtaining the consent of the remaining limited partners/shareholders. This allows remaining shareholders to maintain control over whom they deal with.
- Auctions: This allows a shareholder to sell their respective shareholdings to the highest bidder.
- Right of First Refusal: A right of first refusal is a right which existing shareholders have to purchase the shares before non-shareholders can purchase them The issue (and disputes) often comes down to how to value the shares. Typically, share values in these circumstances can be valued ahead of time based on a schedule (that should be updated periodically), by third parties (e.g. independent valuators and auditors), based on fair market value (i.e. what would an outside party pay for the shares if that party did not need to purchase the shares and if the party transferring the shares did not need to transfer them – i.e. it’s determined by demand and supply), or some pre-determined formula (e.g. a multiple of book value of the shares).
- “Shot-gun” Buy-Sell: This clause allows one party to state a price at which it is willing to either buy or sell shares. The offer is then presented to the other party, who is given a specified amount of time to decide whether to accept the offer to purchase, or to decline the offer and sell at the stated price.
- Right to Come Along (“Piggy-Back”): If one shareholder sells to a third party, then the remaining shareholders are entitled to have their shares sold on the same terms to that third party.
- Right to Take Along (“Draw Along Right”): This right allows a third party to purchase shares of an unwilling shareholder if a certain number of shareholders agree to sell or transfer their shares to that third party. This clause is then triggered, thereby forcing the remaining shareholders to be drawn along and have to sell their shares.
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