Shareholders' Agreement drafted by a lawyer - Essential clauses!

Do you have a corporation incorporated in Quebec?

In this case, there are several elements and obligations to avoid potential conflicts or sanctions imposed by legislation. To achieve these, there are several options available to you.

In the case of incorporations in Quebec, one of the options that can be strongly necessary is without a doubt the drafting of the shareholders’ agreement of your corporation.

However, simple drafting is not sufficient when you wish to establish your shareholders’ agreement. Indeed, there are several obligations in the current laws that you will have to respect.

Thus, it is preferable to call upon a lawyer specialized in business law in order to have an agreement in which you will have all the essential clauses and therefore, you will be able to anticipate all possible situations.

Avocats PME explains everything you need to know about the shareholders’ agreement and the essential clauses to plan!

What is the purpose of the shareholders’ agreement in Quebec?

Although not mandatory, the shareholders’ agreement is a greatly essential document. Indeed, the agreement will facilitate the management of a company and will also give a certain direction to the shareholders according to the moments surrounding the life of the company.

Also, the shareholders’ agreement has the advantage of allowing to overcome all the risks likely to occur in business relations. Thus, it will be possible for you to include clauses concerning several elements, notably the company’s relations with other entities.

A shareholders’ agreement is, in a way, a contract in which the shareholders will provide all the rules that apply to them. Indeed, since the shareholders make a financial and personal contribution, it is quite normal for them to draft a document in which they protect themselves.

However, the shareholders’ agreement can greatly differ if you are in a corporation incorporated in Quebec or if you are in a smaller company.

Indeed, in the second case, it is recommended to opt for the drafting of a unanimous shareholders’ agreement. This will allow you to limit the powers normally attributed to a board of directors in favor of the shareholders.

If you make the decision to adopt a shareholders’ agreement, you can sign this agreement as soon as your company is incorporated. On the other hand, it can be drafted at any time.

In addition, once adopted, nothing prevents you from modifying it so that it truly reflects the ambitions and direction of your company in real time. If you have questions about the shareholders’ agreement, it is better to call on a lawyer specialized in business law.

Fortunately, thanks to Avocats PME, you can find a lawyer without any commitment on your part!

What is a unanimous shareholders’ agreement?

As mentioned, there are certain situations in which a unanimous shareholders’ agreement is preferable .

However, what differentiates this agreement from the more traditional one?

In Quebec, the main purpose of the unanimous shareholders’ agreement is to restrict, or even completely remove the powers of the directors of the company. Thus, even though it may seem like a simple agreement to some, the unanimous agreement also allows shareholders to deviate from the various legislative rules that apply to the corporation.

First and foremost, it is important to know that this unanimous agreement allows shareholders to restrict the various powers of the directors. In order to successfully interfere, there are several ways to go about it. Indeed, you can require the direct or indirect involvement of the shareholders.

For example, it will be possible for shareholders to modify the majority rule in the decision-making process by the board of directors. To do this, a unanimous agreement could apply an increase in the number of required votes or the attribution of veto rights.

Also, it would be possible for shareholders to require their approval for the decisions of the board of directors. However, this decision does not seem to be the best alternative since it imposes a more significant delay.

Attention!

Even if the withdrawal of powers may seem, at first glance, a good idea, there is nevertheless a certain amount of risk that can be associated with the decision in question. Indeed, this means that the directors will now be subrogated to the obligations and responsibilities of the directors.

Since shareholders have, thanks to the unanimous agreement, the right to withdraw powers from the administration partially or totally, it will be necessary for shareholders to replace the directors in their functions. Consequently, this possibility allows the shareholders to exercise a certain form of control over the economic activities of the company.

Obviously, to be considered as a unanimous agreement of shareholders, it is important to respect certain rules. Thus, one of the first formalities is that the agreement must be signed by all shareholders, regardless of whether they have a right to vote or not.

Once constituted, the unanimous agreement of shareholders will bind all present and future shareholders . However, it will necessarily be necessary to inform new shareholders so that they are bound by the agreement. In addition, it will be important to keep a copy in the company’s books.

To comply with legislation, the unanimous agreement must also be declared to the Registraire des entreprises du Québec and it will be necessary to indicate the contact details of the shareholders if they withdraw all powers from the administration.

Finally, in the event that your company makes a first call for tender or if your company merges, the unanimous agreement of shareholders will automatically end.

To know everything about the unanimous agreement, it is better to call Avocats PME right now to find the business lawyer you need!

Shareholders’ agreement in Quebec: What are the main clauses to foresee?

If you are about to draft your shareholders’ agreement, there are many clauses to foresee.

Although it is an exercise requiring little formality, it is nevertheless that certain clauses are strongly recommended in order to foresee any eventuality.

Here are the recommended clauses when it comes time to draft a shareholders’ agreement in Quebec:

The clause related to voting

First and foremost, it is important to take the time to establish all clauses that may be related to the voting rights of your company’s shareholders.

Indeed, they will necessarily want to know the way to exercise their rights.

**Did you know?**Unlike a company director, the shareholder has no obligation towards it. Thus, it is possible for him to vote according to his own interest if he wishes.

When it comes to clauses related to the voting rights of shareholders, it is important to keep in mind that it is not possible for you to indicate how shareholders must vote. Indeed, they can exercise their right as they see fit.

Nevertheless, it is still possible to add clauses concerning the procedure surrounding the voting rights of shareholders, notably:

• The veto right clause, and
• The special majority clause.

If you decide to include one of these two clauses, it will be important to include a list of the rules subject to such a right. For example, in the case of the special majority, it will be possible to indicate the percentage of voting rights required depending on the subject discussed.

Obviously, not all subjects can be the object of a veto right or a special majority. However, there are several situations in which this will be possible:

• The creation of subsidiaries,
• The merger of the company,
• The issuance of shares, or
• The declaration of bankruptcy.

Finally, it will also be possible to indicate to what extent shareholders can entrust the exercise of their voting rights to a third party as well as the deadlines to be respected in order to indicate the proxy to the company.

The clauses concerning the allocation of profits

Then, another common clause concerns the allocation of profits from the company as well as the reimbursement of expenses.

For such a provision to be legal and enforceable against third parties, it is important to take into consideration the rules surrounding the unanimous agreement.

Regarding the profits…

As for the allocation of profits and the reimbursement of certain expenses, it is important to keep in mind that the interest of each shareholder will be different. For example, it is normal for the shareholder who is not a paid worker by the company to disagree with a salary that goes above the market conditions.

Therefore, the clause concerning the allocation of profits will help to avoid potential conflicts between the different shareholders of the company. This one could provide for a provision imposing a percentage of the company’s profit in dividends.

The shotgun clause

One of the most interesting clauses for a shareholders agreement is undoubtedly theshotgun clause , a clause concerning the purchase and sale of shares of the concerned company.

This clause will allow a shareholder to propose to buy the shares of his co-shareholder at a determined price. In the case of theshotgun clause, it will be possible for this co-shareholder to refuse and buy the shares of the other party at the price he himself established.

In principle, this clause will only be used to end a dispute between two shareholders within the same agreement. However, this should only be used between two shareholders with the same economic strength to avoid any abuse.

To be foreseen! In order to avoid abuses from the one who initiates the process of the shotgun clause, it can be interesting to include an obligation according to which it is necessary for him to prove that he has the necessary funds to buy the shares at the indicated price.

Also, in a shotgun clause, it is important to include a relatively short deadline for the process.

For example, it is possible that this one turns around 30 days. This clause should ideally impose the sending of a written notice to avoid any complication.

The preemption clause

When drafting a shareholders’ agreement, it is common that they seek to obtain a preemption right. This last is a right allowing all shareholders to have the opportunity to acquire in a priority way compared to a third party.

Normally, it will be necessary to establish a predetermined deadline in which a shareholder can exercise his right. This strict deadline must be in the agreement to be valid.

Moreover, it is common that this right is established as well as the different categories of shares, if applicable. If you wish to establish this right in your agreement, it is necessary that this one be unanimous. Otherwise, it will be necessary to establish the preemption right in the constitutive act of your company or its regulations.

The first refusal clause

Similar to the preemption right,the refusal clause will help to favor the current shareholders of the company who signed the agreement compared to third parties or shareholders who are not members of it.

The first refusal clause will allow shareholders to have the right to acquire in a priority way the shares of another party compared to third parties. Obviously, this right must also respect a certain deadline that will be in the shareholders’ agreement.

Moreover, the terms of this clause will frequently allow the other shareholders to have the possibility to obtain a copy of the offer made by the third party as well as a document according to which, in the absence of a refusal by the other shareholders, he undertakes to sell his shares.

The piggy-back clause

In the case of the piggy-back clause , a minority shareholder can demand that a third party wishing to buy shares from a majority shareholder must also buy his shares. If the third party refuses, he will not be able to buy the shares in question.

Therefore, the third party must not only buy the shares of the minority shareholder, but he must also respect the same conditions that were established for the acquisition of the majority shareholder’s shares.

In addition, this clause can also work in the other direction. Indeed, the piggy-back clause can also provide that in the event where a majority shareholder wants to sell his shares to a third party, and a minority shareholder doesn’t exercise any rights, the latter could be forced to sell.

The non-competition clause

Also, the shareholder agreement can also include provisions prohibiting shareholders, throughout their participation as such in the company,from working for a competing company.

In addition, the non-competition clause can also provide a delay that will exceed the period when the shareholder will dispose of his shares in the company. However, for such a clause to be valid, it is important that it respects several conditions, notably:

• Limit in time,
• Limit in space, and
• Limit the prohibited activities.

Indeed, it is not possible for a shareholder agreement to completely prohibit a former shareholder from exercising his right to work. Therefore, in the event that such a clause exists, it is preferable to ask a competent court to render it null and void.

In the event that you wish to opt for this clause, there is also the non-solicitation clause. This one prohibits shareholders from soliciting company staff members and customers in order to end their professional relationship with the company.

The confidentiality clause

Another frequent clause in shareholder agreements is undoubtedly the confidentiality clause. Indeed, as a shareholder, it is quite possible that you have some access to information deemed confidential.

Thus, the agreement may provide for rules relating to the protection of information to which shareholders have access. In addition, it is quite possible for this confidentiality clause to have an unlimited duration.

This clause can protect several elements related to the company, notably confidential information, business plans and trade secrets. However,this list is not exhaustive.

The clause prohibiting certain transactions

Another frequently discussed subject in shareholder agreements is undoubtedly the prohibitions relating to certain transactions concerning the company’s shares. As a general rule, the agreement of a private company cannot alienate the issued shares, unless it respects the terms therein.

Therefore, it is common for an agreement to mention the prohibition of any alienation unless the other shareholders have had the chance to acquire the shares on a priority basis.

Not so fast!

In principle, when a shareholder agreement has a prohibition clause, it will be necessary to include definitions for certain terms, notably the words “share” and “alienation”. This helps to better understand the limits imposed by the agreement.

In other words, this can require obtaining an offer issued by a third party as well as a right of first refusal for co-shareholders before being able to sell your company shares.

So, as you can see, there are several clauses to incorporate into your shareholder agreement. To get a better idea of your situation, it is better to consult with a business law attorney.

By filling out the online form, Avocats PME allows you to find a legal professional quickly and free of charge.

Owner of a corporation - 6 questions to ask yourself in order to draft a shareholder agreement!

When you are about to consult an attorney to draft your shareholder agreement or to modify it, it is important to take the time to ask yourself a few questions in order to be prepared for any eventuality.

Thus, here are the 6 questions to ask yourself as a business owner to facilitate the drafting of your agreement:

When was the last time you evaluated your business?

First of all, the first question the owner will have to ask himself is if he has recently carried out an evaluation of your business .

Obviously, if you have a closed company, it is normal for you to naturally have knowledge of the real value of your business.

However, if your company is open, the evaluation of your business based on market value will be strongly recommended. In this case,you will need to call on a professional evaluator . This could be all the more useful when one of the shareholders wants to sell his shares.

Thus, to anticipate future evaluations of your business, you will be able to predict the method for evaluating the value of your business. This will allow for some consistency in your evaluations.

Also, by choosing the calculation method in advance, you will be able to avoid potential conflicts between the selling shareholders and the potential buyer. Indeed, in this case, you simply have to rely on the agreement.

Good to know! Even though determining the evaluation method may be relevant, it is better to take the time to provide for a dispute resolution plan in order to resolve conflicts surrounding the final evaluation.

Also, if you do not wish to constantly modify your shareholder agreement when a value is revised, you will be able to add an appendix or a clause allowing for the adjustment of the value of your business.

What will happen when a shareholder has died?

Even though this is never desirable, it is still possible for one of the shareholders to become unavailable, notably due to illness or death. Thus, it might be interesting to provide for a share buyback clause.

This clause will allow you to clarify the steps to follow when one of the shareholders becomes unfit. This is a clause that does not have a lot of formality. Therefore, you will be able to opt for a mechanism that respects the ambitions of your company.

For example, for companies in Quebec, it is common for the agreement to include one of the following options:

• The option to buy back by other shareholders of the company, or
• The repurchase of shares directly by the company.

Whatever option you choose, it is important to keep in mind that the primary objective of this clause is to guarantee the preservation of control of the shares while giving fair value to the former shareholder.

This will also allow shareholders to appropriately plan their estate with full knowledge of the facts. The buyback clause will therefore prevent the shareholder from bequeathing his shares to heirs.

It is also important to provide a financing method in the clause on the repurchase of shares in the event that it has to be applied. There are several sources of financing, including:

• Life insurance,
• Disability insurance,
• Your company’s borrowing capacity,
• Your company’s liquidity, and
• Financing from other shareholders.

On the other hand, in the vast majority of cases,insurance will be the most effective means to apply a buyback clause. However, other sources may be more suited to your situation.

So, this is a good time for you if you wish to subscribe to insurance to cover the repurchase of a shareholder’s shares in case of disability. Otherwise, if you do not have insurance, the shareholders’ agreement will have to provide for another alternative.

Do you have a backup plan for your business?

Obviously, the shareholders’ agreement and the backup plan are two different elements. However, it is still preferable to draft these simultaneously to ensure that shareholders are aware of the backup plan.

Normally, a contingency plan will mainly focus on the activities of the company as well as on its operation when management is in an emergency situation . Therefore, the contingency plan will specify to a management team the procedures to ensure the smooth running of the company’s operations.

Conversely, the content of the shareholders’ agreement will normally focus on the various operations and the relationships between the shareholders of the company in question. Thus, it is possible to affirm that the two documents are in some ways complementary.

Want to draft a contingency plan for your company? Contact Avocats PME now to find the business lawyer you need!

Have you considered the tax possibilities and restrictions in your agreement?

Then, it is important to make sure that the agreement remains relatively flexible in its drafting to allow your shareholders to take advantage of tax regimes when you apply the clauses of the agreement.

For example, this will be the case in the event that you have to distribute funds to shareholders.

However, when you want to draft a shareholders’ agreement, there are several considerations:

• The citizenship of shareholders,
• The residence of shareholders,
• The family ties of shareholders,
• The use of a capital dividend account (if you have taken out life insurance), and
• The possible reduction of the impact of loss minimization rules (buyback clause).

In short, this is an important issue, and therefore, it is important to take the necessary time so that you can have a global picture of your company’s situation at the time of drafting your shareholders’ agreement.

How is your personal planning going?

It is common for a business owner to focus entirely on planning their business. However,what about their personal planning? Indeed, the agreement will only govern the relationships between the different shareholders.

Thus, the document will not give a precise indication as to the distribution of an estate. This will also be the case for the management of personal wealth of a shareholder in Quebec.

Therefore, they should take the necessary time to review their personal plan and revise it in the event that new provisions are adopted in the agreement.

In this case, it is still preferable to consult a specialized lawyer to get the right advice.

By filling out the Avocats PME form, you will be able to find the lawyer you need for free!

What is the structure of your current company?

Finally, another important question to ask is what is the structure of your company at the time when you wish to proceed with the drafting of your shareholders agreement.

This question is all the more important as it justifies the modification of your agreement once it is completely written. Indeed, the new structure may justify a revision of your legal document.

For example, if you carry out an estate freeze or if you add shareholders, it will be necessary to consider the relevance of a revision of your shareholders’ agreement. The main objective of this document is to reflect as accurately as possible the situation of your company.

What are the consequences of not having an agreement?

Since it is not mandatory for a company in Quebec to have a agreement between shareholders, it is entirely possible that the company does not initiate the procedures to obtain this latter.

However, what are the consequences of such a decision?

First, it must be understood that this decision only affects the shareholders of the company. Indeed, in this case, it is possible to affirm that the minority shareholder will have very limited rights.

Moreover, the rights of shareholders should not be considered as an obstacle to the interests of the company or to those of the majority shareholders as they will have the final word on the direction to take for the company in question.

Thus, if the company does not have a shareholders agreement , the minority shareholder really only has the right to attend meetings and approve the annual financial statements. The latter can also vote at meetings.

However, in practice,since a simple majority is required for most decisions, his vote may not have real consequences on the directions taken by the company and its shareholders’ meeting.

Also, even if the minority shareholder also has an employee status within the company, this has no effect on the limits that are imposed on his role. Therefore, in the event that he oversteps his powers, he may suffer the consequences.

To draft a shareholders’ agreement, call on a business law lawyer!

As you can see, there are several rules to follow when you want to draft a shareholders’ agreement. Whether it is in terms of substance and form, the failure to respect the numerous rules could lead to numerous sanctions.

Therefore, it is strongly recommended to call on a professional so that he can assist you throughout the drafting process. He can also suggest alternatives based on your company and your objectives.

In this case, the best professional for you is undoubtedly the lawyer specialized in business law. Indeed, the latter will have the experience and the necessary skills to assist you in all the legal procedures surrounding your company.

Finally, in the event that a dispute concerning your company arises, the lawyer can also represent you during negotiations and hearings if it goes before a judge.

To find the business law lawyer you need, it is better to call on Avocats PME.

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