People usually go into business together with the best intentions. But they do not always start with the same understanding of how their business will operate. And then, life and business do not always go as expected. Sometimes, there are opportunities for growth, but they come with more work, capital investment and risk. Other times, there is adversity. For any small business, especially when the business partners are owner-operators, it is important to have a shareholder agreement. This agreement allows partners to agree beforehand on how they will contribute to operations, and how to move forward during growth or adversity. In the case of owner disputes, a shareholder agreement provides options for resolution. For those already operating businesses without a proper shareholder agreement, in case of a dispute there are other legal options available.
The key terms of a shareholder agreement include the following:
- Description of the work each partner will do for the business, and whether they will be paid as employees
- Requirements for partners to contribute their personal money to fund operations, or provide personal security for banks to fund operations
- Who are the decision makers, and which types of operational decisions require unanimous consent
- When does the business pay out its profits to the partners, or when does the business retain profits to fund future growth and as a contingency for unplanned expenses
- What happens if a partner retires, becomes sick or otherwise incapacitated, or dies, and whether the business carries insurance in such cases
- Consequences if a partner fails to comply with the shareholder agreement, including compulsory sale of shares at a reduced value
- ‘Shotgun Clause’, so that one partner can compel the purchase or sale of shares with another partner
- Provisions restricting whether partners are permitted to compete
When business partners have a shareholder agreement addressing these types of issues, there is certainty in terms of each partner’s legal obligation if the issues become relevant. Without a shareholder agreement, the business partners are more likely to argue without having any clear way to move forward. Without a shareholder agreement, the British Columbia law called the Business Corporations Act might apply. This law gives options to compel directors and shareholders to take action when the parties are at a standstill (in the case of 2 business partners) or when a majority is unfairly treating the minority (typically in the case of 3 business partners with a personal conflict).
For business partners who do not have a shareholder agreement, the Act offers solutions. That is the good news, when no other options are available. However, proceeding through litigation under the provisions of the Act is likely to be much more expensive, and comes with risk and uncertainty in terms of the outcome. This is why it is much preferable to have a shareholder agreement.
If you are a business partner, and things are going well, but you have never completed a shareholder agreement, then now is the right time to do so. These agreements are best made when the partners are getting along. If you are starting a new business, then your best practice is to complete a shareholder agreement first. This helps ensure that the partners are on the same page from the start. If you are involved in a dispute, you would be wise to seek legal advice about your options, whether you have an existing shareholder agreement or would need to rely on the Act.
Morelli Chertkow LLP Law Firm employs several skilled business lawyers who are able to assist you in addressing these matters during good times, to support your success, or while a problem can still be resolved amicably. And then, several experienced commercial litigators who are able to represent you in litigating these matters, if they become disputes which cannot otherwise be resolved.
By Ben van der Gracht