A shareholder agreement is a contract between co-owners/shareholders of a company that sets out the rules for how a company will operate.

It is advisable to have a shareholder agreement whenever you form a company with arms-length third parties.

The main topics covered in a shareholder agreement include:

  • Day-to-day operations
  • Financing the company (bank loans or shareholder advances to the company)
  • Signing authorities for bank accounts and contracts
  • How company money will be distributed
  • Meeting rules for directors, officers and shareholders
  • Rules that govern the transfer of shares (including right of first refusal; “piggy back” clauses; “shot gun” clauses; and death of a shareholder)
  • Disability, bankruptcy and divorce of a shareholder
  • Valuation of the shares of the company
  • Arbitration for any disputes
  • Non-disclosure, non-competition and non-solicitation

If a shareholder agreement is not entered into during “good times”, then if the business relationship takes a turn for the worse, it will be too late to implement the above rules. The result can be costly and lengthy court battles to determine a buy-out process and valuation.

Should you wish to discuss shareholder agreements, please contact Kay Law today.