A shareholder agreement heads off conflict by settling decisions, transfers of shares, departures, disability and death. For a small business the Simple package at $699 covers the essentials; without an agreement, the law alone decides.
Two friends found a business. Things go well, then life intervenes: one wants to sell, the other does not; one falls ill; one divorces and a former spouse claims half the shares. Without a shareholder agreement, any of these ordinary events can paralyse the corporation or destroy years of work. With a good agreement, they are already settled.
An insurance policy for your partnership
A shareholder agreement is a contract by which the partners set, in calm conditions, the rules that will govern their business relationship. It supplements the law and the corporation’s articles, which stay silent on the essentials: how decisions get made, how things get shared, and above all how people part. The comparison with an insurance policy is not overdone. You sign it hoping never to use it, and on the day the loss occurs you thank yourself for the foresight.
Providing for how decisions get made
Who decides to hire a key employee, to borrow, to pay dividends, to sell the business? Failing an agreement, the law gives management to the board and the big decisions to a majority vote of the shareholders. A 50% partner can therefore end up deadlocked, and a minority shareholder sidelined. The agreement establishes which decisions require unanimity, a special majority or the consent of one particular shareholder. It turns implicit balances of power into clear rules.
Providing for departures, voluntary or not
This is the heart of the document. What happens if a shareholder wants to sell? A right of first refusal lets the others buy the shares before any outsider. What happens on death? A buy-sell clause, often funded by life insurance, lets the estate be paid and the survivors keep control. Disability, retirement, personal bankruptcy, loss of the right to practise: each scenario deserves its own mechanism, with a method for valuing the shares and realistic payment terms.
Providing for disagreement
Deadlock between equal partners is the silent killer of small businesses. Well-drafted agreements provide for a gradation: an obligation to mediate, then, if nothing works, a forced exit clause. The best known, the shotgun, lets one partner offer a price for the other’s shares, leaving the other to sell or to buy on the same terms. Brutal, but formidably effective at guaranteeing an honest price.
The best argument for an agreement remains the comparison with what happens without one.
| Situation | Without an agreement | With an agreement |
|---|---|---|
| A shareholder wants to sell to an outsider | Nothing requires it be offered to you first | Right of first refusal |
| Death of a shareholder | The heirs become your partners | An organized and funded buy-back |
| A partner stops working | They keep their shares and their rights | Buy-back triggered, value according to the circumstances |
| Deadlock between two equal partners | Paralysis, then court proceedings | Mediation, then an exit mechanism |
| Price of the shares | To be negotiated in the middle of a crisis | Method agreed in advance |
| Competition after a departure | No restriction | Commitments framed and kept reasonable |
The right moment to sign is the one when everything is going well between you.
When to sign it, and with whom
The best moment is the day everything is going well, ideally at the constitution of the corporation or when a new shareholder arrives. Negotiating these clauses in the middle of a crisis is close to impossible. As for the “template found online”, it gives a false sense of security: an agreement is worth what it is worth by how well it fits your precise situation, the number of partners, their contributions, their families, their horizon. That is exactly why each of our agreement packages includes time with a lawyer to fit the clauses to your situation.
Shareholder and employee: two hats people confuse
This is probably the misunderstanding that produces the most conflict in small businesses, and it fits in one sentence: dismissing a partner does not take away their shares.
Two people found a business, split the shares and both work full time. One stops delivering, or leaves for another project. Their employment is terminated, and it then emerges that they still own half the business, still hold their voting rights, their right to information and their share of the dividends, while no longer giving it an hour. The employment relationship and the shareholding relationship are legally distinct; ending one leaves the other intact.
A properly drafted agreement meets this case head on. It provides for what happens to the shares when a shareholder stops being active in the business, with a buy-back mechanism and, often, a different value depending on the circumstances of the departure. It can also make the allocation of shares subject to progressive vesting, so that someone who leaves after eight months does not keep the stake intended for ten years of commitment.
The spouse, separation and succession
Shares in a corporation are property, and they therefore follow the rules applicable to their owner’s property. In Québec they are not part of the family patrimony in the strict sense, but they can nonetheless be affected by the spouses’ matrimonial regime, particularly under partnership of acquests. A separation can therefore bring into the equation someone the other partners never chose.
Death raises the same question from another angle: with no mechanism, the shares pass to the heirs, who become your business partners overnight. The agreement cannot set aside family law or the law of successions, and anyone promising it can should be treated with suspicion. What it can do, and should do, is organize the buy-back so that the value goes to those entitled without control of the business going with it. This side coordinates with your will: an agreement and a will that contradict each other open exactly the litigation you were trying to avoid.
What an agreement cannot do
Let us be clear about its limits, because a document believed stronger than it is produces a false sense of security. The agreement binds those who sign it: it is no answer to a creditor of the corporation, to a supplier or to the tax authorities. It cannot set aside mandatory rules of law, and a clause purporting to relieve a director of their fundamental duties would not hold. Nor does it replace the corporate records : the transfers it governs must still be documented and entered.
Finally, it does not repair a badly conceived partnership. If the allocation of shares does not reflect the real contributions, or if no one has ever discussed what each expects of the next three years, no clause will fill that gap. The conversation comes before the document; the document only records its result.
For the business’s other contracts, a lease, a subcontract, a service agreement, see what a review checks.
When the simple agreement is no longer enough
The basic package covers the most common situation: two or three partners, comparable contributions, a business in operation. Certain signs mean you need to go further: an outside investor, very unequal contributions, a large number of shareholders, a holding corporation in the chain, or a plan to sell in the medium term. Those cases call for the mechanisms described in our article on the advanced agreement. And if your aim is genuinely to shift decision-making power from the board to the shareholders, it is the distinction between an ordinary agreement and a unanimous one is what has to be understood first.
Frequently asked questions
Is a shareholder agreement mandatory?
No, no law requires one. Without it, the law’s default rules apply, and they provide neither a right of first refusal, nor a buy-back on death, nor an exit mechanism for deadlock between equal partners.
Does dismissing a partner take away their shares?
No. The employment relationship and the shareholding relationship are legally distinct. Someone whose employment is terminated remains the owner of their shares and keeps their voting rights and their share of the dividends, unless a buy-back mechanism is provided by an agreement.
When should the agreement be signed?
On the day everything is going well between the partners, ideally at the constitution of the corporation or when a new shareholder arrives. Negotiating these clauses in the middle of a crisis is close to impossible.
Are you an accountant, tax adviser or consultant acting for the client who has to sign this agreement? Our article on collaboration between advisers and lawyers sets out what the law reserves to lawyers and how to hand off the drafting without losing the file.