Kevin Greenard: Shareholders’ agreement useful for planning

Over half of the companies we work with have a relatively straightforward shareholder situation – either single shareholder or joint ownership with their relative.

For companies where we have shareholders that extend beyond a single household, we encourage a group meeting (in person or by conference call) to ensure the appropriate level of planning is in place.

Collecting information

Part of the Know Your Client (KYC) process is for us to collect information about our clients so that we can provide them with the most appropriate recommendations. For clients who are shareholders of a private company, we will also collect additional information.

One of the main questions is understanding the shareholding structure of the company, including who the shareholders are, the voting rights and whether a shareholders agreement is currently in place.

Shareholders’ agreement

Simply put, a shareholders’ agreement is a binding contract between the shareholders of a company. It provides a method of dealing with what happens if a significant life event (such as death or disability) or significant shareholder development (such as a liquidation of shares) occurs.

This contract directly affects the rights and obligations of shareholders towards each other and their relationship with the company.

While it is up to the shareholders to determine which provisions should be included in the contract, it usually addresses the most important business transition issues such as ownership of shares, the portability of those shares and how to deal with management disputes. that affect the viability of the business.

Unanimous shareholders’ agreement

In most provinces, including British Columbia, if the contract is agreed to in writing by all shareholders, it can be considered a unanimous shareholder agreement, which is legally binding on all shareholders.

This type of agreement is particularly useful in family businesses because it can reassure founding shareholders that their vision for the business can continue when they are no longer involved.

Introduction of a shareholders’ agreement

The process of drafting a shareholders’ agreement takes time. If, during discussions with our client, we think he should consider a shareholders agreement, we will hold a meeting specifically for this purpose.

Many of the terms of a shareholders’ agreement can seem complicated and difficult to understand. We encourage a first meeting with the shareholders in order to review the different modalities. Here are some of the main terms we will cover.

Restriction sharing rights

Share restriction rights give shareholders the right to buy or hold shares in the company in proportion to their shareholder interest. Share restriction clauses can specifically place restrictions on who can become a new shareholder when transferring existing shares of the company.

Share repurchase rights

Having the right to repurchase shares in a company in the event of the death, disability or bankruptcy of a shareholder is essential, especially where there are significant family relationship issues that may affect control of the company. the company.

There may also be an immediate need for income or capital to meet family financial obligations or to pay estate debts. An effective buyout clause with both optional and mandatory event clauses can resolve these control and financial need issues in a way that works for all shareholders.

Assessment fees

Purchase price or fair market value clauses establish how the share price is determined in a buyout situation. There are many options for determining the valuation of a business.

Some of the options for pricing a company’s stock may include: 1) a unanimously agreed upon business formula; 2) Have an independent value established by a third party, such as a professional appraiser; 3) Set an initial value and ask shareholders to update the value at agreed intervals.

The strengths and weaknesses of each approach should be explored in depth. It is also equally important to establish how the buyout would be financed.

Life insurance

Using life insurance is one of the most common and cost effective approaches. Insurance is often taken out on the head of the shareholder concerned and belongs either to the company or to the other shareholders in order to finance a buyout in the event of death. Our preferred approach is usually company owned insurance.

The life insurance aspect involves important planning and tax considerations that should always be discussed with a professional who has the appropriate insurance license. As a portfolio manager, I also hold a dual license to provide life insurance to our clients.

For this strategy to be effective, individual shareholders must be insurable (i.e. no pre-existing health condition that would prevent them). The starting point is often to do a quote and go through the subscription process with each shareholder if they are open to this component of the deal. This step alone can take a few months.

First refusal rights

The right of first refusal clauses require that before selling to an outside third party, a shareholder first offers the right to buy his shares to the other or to the other shareholders. However, it is often necessary to already have a third party offer in hand.

This potential circumstance can be problematic depending on the relationship issues that can arise when an outside third party is brought into a family business.

At the very least, beacon or displacement clauses should be considered; these provide for options for shareholders to accept voluntarily or by mandate such offers.

Dispute Resolution Rights – “Shotgun Clauses”

Some existing business partners may not get along for personal reasons or strained relationships. If there is a dispute in the future, the classic shotgun clause is a commonly used mechanism to resolve these issues. For example, one shareholder sets the price and terms under which they would buy or sell shares and the other shareholder has the option of accepting or redeeming the trigger shareholder.

Such clauses have the advantage of obliging shareholders to settle their internal disputes or to be redeemed. They are most effective in the event that each shareholder has a reasonably similar financial situation.

Auction clauses

When there are three or more shareholders, there may also be auction clauses, where the shareholders must sell to the highest bidder.

Seek legal advice

When we have clients with an existing shareholders agreement, this is factored into the financial and estate plans that we prepare. In some cases, we recommend updating the shareholders’ agreement. For clients who are halfway through the process of a shareholder agreement (ie.

If, during our KYC discovery, we see a situation where a client does not have a shareholders’ agreement, and we feel that it may be applicable, then it is added to the agenda for discussion. There are lawyers specializing in commercial or corporate law, with extensive experience in drafting shareholders’ agreements.

Not having an agreement

Failure to consider shareholder rights can often lead to tragic circumstances for shareholders, their companies and their families. In the absence of an updated shareholders’ agreement, such conflicts cannot be resolved without resorting to costly litigation.

Kevin Greenard CPA CA FMA CFP CIM is Portfolio Manager and Director, Wealth Management within the Greenard Group at Scotia Wealth Management in Victoria. His column appears weekly on Call 250-389-2138, email [email protected] or visit

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