Shareholder Agreements & Disputes
Protect your investment as a shareholder
A shareholder agreement outlines your rights, responsibilities, and relationship as a shareholder. Disputes occur when the agreement is violated or does not cover the issue of conflict. Learn more.
What is a shareholder agreement?
A shareholder agreement is a document that outlines your rights and responsibilities as a shareholder within a company. It sets out the terms and conditions which govern the relationship between fellow shareholders and the company and can regulate the operation of the company. This agreement will generally detail how decisions are made, the rights prescribed to different classes of shares, how those shares can be transferred, and how disputes are resolved, among other things. As a shareholder, some of your duties may include:
- election of directors
- approval of fundamental changes to the company
- reviewing the financial statements
- right to appoint auditors
Protect your rights and interests by consulting with an experienced shareholder agreement lawyer. Our team can review your shareholder agreement and help address your concerns.
Why do you need a shareholder agreement?
Having a shareholder agreement is critical because it provides you with a clear framework of how the relationship between shareholders and the company is governed, reduces potential conflicts by setting expectations upfront regarding the rights and obligations tied to shares in the company, and protects the interests of both majority shareholders and minority shareholders. If you are a minority shareholder, it can offer safeguards that require more than a simple majority for significant decisions, protection against unwanted third-party shareholder investment, or the right to participate in the sale of shares (tag-along rights). As a majority shareholder, you benefit from provisions that can facilitate a strategic exit where opportunities for a merger or acquisition arise, such as drag-along rights, which can allow you to exit the investment under favourable conditions.
What should your basic shareholder agreement contain?
Key components of a typical shareholder agreement include:
- Rights and Obligations of Shareholders: This includes your voting rights, dividend policies, and your responsibilities towards the company and each other.
- Sale and Transfer of Shares: The agreement outlines the process for how and to whom you can sell or transfer your shares.
- Company Management and Governance: Details regarding your board’s composition, decision-making processes, and meeting frequencies.
- Protection of Minority Interests: Provisions outlining which decisions need to be agreed to by more than a simple majority of shareholders.
- Resolution of Disputes: Provides you with different methods for resolving internal disputes, including through alternative dispute resolution (ADR) or shareholder exit provisions, which can help to avoid lengthy and costly legal battles between yourself and the company.
- Competition and Confidentiality: Restrictions on you as a shareholder that prevent you from competing with the company or disclosing confidential information about the company.
- Exit Strategies: Including tag-along and drag-along rights to ensure fair treatment during major share transactions.
When should a shareholder agreement be created?
Shareholders agreements can be created at any time after incorporation. It is highly advisable to create a shareholders agreement as early as possible, ideally at the time of incorporation or immediately upon the issuance of the first shares.
Establishing a clear agreement from the outset provides certainty and clarity for all shareholders regarding their rights, obligations, and responsibilities. A comprehensive shareholders agreement, designed with the assistance of an experienced shareholder agreement lawyer, can help minimize future disputes by setting expectations and safeguarding shareholder interests. The Ontario Business Corporations Act (OCBA) provides a framework for managing shareholder rights and company governance, yet its standards are often broad. Having an agreement in place from the start not only helps you avoid potential misunderstandings but also brings stability as the business grows and new investors or future shareholders join.
When do you stop being a shareholder?
You cease to be a shareholder once you no longer hold any shares in the company, whether through the sale of your shares to a third party, another shareholder, or back to the corporation, or when the company itself is dissolved. While the process may seem simple, a shareholder agreement often includes specific procedures around share transfers, such as the right of first refusal and shareholder approval requirements, which can directly impact the selling shareholder.
Why do shareholder disputes occur?
Shareholder disputes often emerge when you have:
- a difference of opinion on how the business should be run
- financial concerns or distress within the company
- issues on distribution of profits
- concerns about a potential breach of fiduciary duty
- concerns on selling or transferring of shares, including to outside parties
- concerns about your rights as a shareholder
- conduct by directors, officers, or other shareholders that is seen as unfair, harsh, or prejudicial to individual shareholders or group of shareholders within the company
- concerns that the terms of a shareholder agreement are being violated
- a shareholder exit from the company or strategic exit opportunity, such as a merger or a third party offer
Exit disputes often stem from disagreements about the terms of your exit, your entitlement and/or the valuation of your shares or the impact your leaving has on company operations and ownership structure. The terms of the shareholder agreement and how your employment contract is written outlining the benefits of your shares, can be critical to ensuring your rights and investment are properly protected and valued.
Whether you have questions about your shareholder agreement, want or need to leave your current company that you hold shares in or are facing a shareholder dispute, Whitten & Lublin can help.
We offer guidance for shareholder agreements and shareholder dispute resolution. After listening to your situation and concerns, a shareholder agreement lawyer from our team will explain your rights and available options. If you are planning to sell your shares, retire or leave the company, we can help create an exit plan. If you have been terminated and participate in a shareholder program, we can ensure your shareholder rights are protected. If you are navigating a shareholder conflict, we can help with negotiations, mediation, other alternative dispute resolution, or if necessary, litigation.
Whitten & Lublin has handled numerous types of shareholder disputes. Our skills, experience, and reputation are widely recognized by both clients and peers, making us one of the most recommended employment law firms in the Greater Toronto Area.
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