You're starting a business with partners. Or your existing company lacks formal governance structures. Without proper agreements and frameworks, you're building on unstable ground.

Why Shareholder Agreements Matter

Corporate statutes provide default rules, but they rarely suit specific business relationships. Shareholder agreements override defaults and prevent conflicts.

What They Address

Decision-Making Authority
Define which decisions require unanimous consent versus majority approval. Major transactions, borrowing limits, hiring key employees, or changing business direction should have clear approval thresholds.

Management Roles
Clarify who manages what. Board composition, officer appointments, and operational authority need definition, especially when shareholders have different involvement levels.

Share Transfer Restrictions
Prevent shareholders from selling to outsiders without other shareholders' approval. First refusal rights, tag-along provisions, and drag-along rights manage ownership changes.

Dispute Resolution
Establish mediation or arbitration procedures before conflicts escalate to litigation. Clear processes prevent costly court battles.

Exit Mechanisms
Deadlock provisions, buy-sell clauses, and shotgun provisions provide paths when relationships fail. Without exit mechanisms, shareholders become trapped.

Buy-Sell Provisions

These mechanisms determine how shareholders exit or force buyouts.

Shotgun Clauses
One shareholder offers to buy the other's shares at specified price—or sell their own at that price. The recipient chooses to buy or sell. This forces fair pricing but works best with equally positioned shareholders.

Right of First Refusal
Before selling to outsiders, shareholders must offer shares to existing shareholders at the same terms. This maintains existing ownership but doesn't address disagreements between current shareholders.

Triggered Buy-Sell Events
Define events triggering mandatory purchase—death, disability, bankruptcy, divorce, or breach of non-competition agreements. Specify valuation methods and payment terms for each scenario.

Valuation Mechanisms

How are shares valued when bought or sold?

Fixed Price
Simple but requires regular updating. Stale valuations create disputes.

Formula-Based
Multiple of earnings, book value, or other metrics. Clear but may not reflect true value.

Independent Appraisal
Professional valuators determine fair market value. Accurate but expensive and potentially time-consuming.

Negotiated
Parties negotiate at the time. Flexible but may lead to deadlock.

Choose methods appropriate for your business and update them as circumstances change.

Corporate Governance Structures

Board Composition and Authority
Define board size, nomination rights, quorum requirements, and meeting frequency. Clarify board powers versus shareholder powers.

Minority shareholders may negotiate board representation rights disproportionate to shareholding—protecting their interests through governance rather than ownership control.

Officers and Management
Specify how officers are appointed, their authority limits, and reporting obligations. Management authority should be clear to prevent disputes and provide operational efficiency.

Information Rights
Shareholders need information to monitor their investment. Define financial reporting frequency, access to corporate records, and communication expectations.

Majority shareholders may prefer minimal disclosure. Minorities need information to detect problems early.

Financing and Capital Calls

Funding Future Needs
How will the company fund growth or weather downturns? If additional capital is needed, are shareholders obligated to contribute proportionally? What if some can't or won't?

Dilution Protection
If shareholders don't participate in new equity rounds, their ownership percentage declines. Pre-emptive rights allow shareholders to maintain their percentage by participating in new issuances.

Loans vs. Equity
Sometimes shareholders provide capital through loans rather than equity. Document terms clearly—interest rates, repayment schedules, security, and subordination to external lenders.

Restrictive Covenants

Non-Competition Agreements
Prevent shareholders from competing while active in the business. Reasonable scope and duration are enforceable in Ontario.

Confidentiality Obligations
Protect proprietary information, trade secrets, and customer relationships. These obligations should survive shareholder departures.

Non-Solicitation
Prevent departing shareholders from poaching employees or customers. Critical for protecting business value post-exit.

Dividend Policies

Disagreements over dividend distributions create frequent conflicts. Should the company retain earnings for growth or distribute profits to shareholders?

Shareholder agreements can establish dividend policies—minimum distributions, timing, or requirements that all shareholders receive proportional benefits (preventing majority shareholders from extracting value through salaries while refusing dividends).

Governance for Mature Companies

As companies grow, governance needs evolve.

Independent Directors
Adding non-shareholder directors brings external perspective, specialized expertise, and helps professionalize decision-making.

Board Committees
Audit, compensation, and governance committees separate oversight functions and improve accountability.

Formal Policies
Written policies covering conflicts of interest, related party transactions, and ethical conduct provide clarity and reduce disputes.

When to Formalize Governance

At Formation
Implement governance structures and shareholder agreements when founding the company. Negotiating is easier when everyone is optimistic and positions aren't entrenched.

Before Raising Capital
Investors require proper governance. Getting structures right before seeking funding streamlines the process.

When Conflicts Emerge
If disagreements are arising, formalize governance before they escalate. Once litigation starts, cooperation becomes nearly impossible.

During Transitions
Succession planning, adding new shareholders, or significant strategic changes all warrant governance review.

Common Mistakes

Operating Without Agreements
Relying on handshake deals and good faith is risky. Memories diverge. Relationships change. Written agreements prevent misunderstandings.

Using Template Documents
Generic templates miss business-specific issues. Professional drafting tailored to your situation prevents problems.

Ignoring Tax Implications
Governance structures and shareholder agreements have tax consequences. Coordinate legal and tax advice.

Never Updating
Agreements written at formation may not suit businesses five years later. Review and update as circumstances evolve.

Need shareholder agreements or corporate governance advice? Contact Hodder, Wang LLP to build strong legal foundations for your business.

This article provides general information. It does not constitute legal advice for specific situations.