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Taayo Simmonds helps individuals and corporations navigate business disputes. Simmonds Law is located in Ottawa, Ontario.
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26 BLawyerisH/July, 2017
● There may come a time in your business that a member wishes to end his or her involvement. What do you do then? Many businesses insert into their shareholder’s agreements a provision giving current shareholders the right to be the first in line in the event another shareholder puts his shares up for sale. Such provisions often include language requiring any shareholder who receives an offer to buy his shares from an outsider to bring that offer to the rest of the shareholders, giving them the option to buy that shareholder’s shares for the same price and under the same terms as those offered by the outside party. The practical effect of such a provision is that it wards off unwanted suitors from outside the company.
● Your company may have trade secrets or other information that would be harmful, or even fatal, to it should outsiders come into possession of it. A shareholder’s agreement is a great place to ensure that participants leaving the company are bound by non-disclosure or non-compete agreements on their way out of the firm.
● Death, divorce, insolvency, incapacity – we rarely spend much time worrying about such situations, but they happen, and there is a good chance that they will happen to one or more participants in your company. Just as estate planning is best done before it is needed, planning for the unexpected involuntary departure of a participant in your firm should be done ahead of time, and a shareholder’s agreement is as good a chance for such planning to be done as any.
● In rare cases, and usually despite the best efforts of all involved, a dispute arises among the shareholders that defies all efforts to resolve it. Although such situations are not common, shareholder’s provisions commonly provide a solution for such situations in the form of what is known as a “shotgun clause.” Such a clause allows an individual shareholder to offer his shares for sale to the remaining shareholder while simultaneously and alternatively offering to buy the other shareholder’s shares for the price stated in the offer. This clause gives a relatively more convenient escape from a difficult situation for shareholders in a business who have roughly similar financial resources. However, in the case of shareholders with significantly different means, such a clause could be used by the more well-heeled shareholder to force the less well-provisioned shareholder into selling his shares.
These are just a few of the significant issues encountered by start-ups and small businesses that a well-crafted shareholder’s agreement can stave off. Although every situation is unique and no two businesses face the same set of challenges, spending a few hours with a legal professional on the drafting of a shareholder’s agreement has the potential to save you and your business untold time and resources resolving important issues in the future.