There is a saying that an ounce of pre-framing is worth a pound of reframing. I have seen too many companies fall apart from shareholder disputes affecting many innocent loved ones. When it comes to shareholders having a vested interest within any profit generating structure having a shareholder agreement in place should become a mandate for many companies.
The majority of small and medium sized businesses do not take the time to put together a shareholder agreement that is legally binding. Often citing lack of time and saving on a few dollars the cost in the long run can come back to haunt them. I recently provided some advice to a local mid-size business here in the Lower Mainland and worked on some of the nuances of their shareholder agreement along with the lawyer. They were extremely grateful with the taxation considerations and legal implications that were mitigated by effectively wording their agreement. In the end it will save them headaches and cash.
Not to be confused with a company’s Articles, shareholder agreements provide a clear and concise outline of agreed terms that individual shareholders abide too. Often well defined roles, responsibilities and functions of each shareholder position are laid out preventing disputes. Designated rights and restrictions regarding authorities among shareholder classifications can furthermore be outlined within agreements. Once signed, these agreements become a legal contract that holds weight if disputes arise. While there are no legal requirements to enter shareholder agreements there are however, aspects of the agreement that must follow cited governing laws within a company’s region.
Utilized to define expectations among the position of shareholders responsibilities these agreements can serve as a bypass from the need for disputes to be mediated or requiring legal intervention based on governing laws. The benefit of this is meant to provide both parties a clear understanding of terms that uphold the interest of each side.
Mandating shareholder agreements as policy provides the proof of ownership percentage when in question or in need of authorizing transfers, sale and valuation of shares, rights and provisions, exit clauses, life insurance and business succession.
Dispute resolution is clearly a reason for wanting to maintain records regarding shareholder agreements as they can document fiscal arrangements and director employment conditions over time. Working with an experienced Chartered Professional Accountant and a corporate lawyer to establish the guidelines of a shareholder agreement is best advised from the beginning as there are numerous taxation and legal implications. These trusted advisors can clearly help provide the terms and condition applicable to the governing region of the business.