Private enterprise is a worthwhile adventure that can be risky for people who are badly informed of their rights or who do not sufficiently safeguard the interests and legal relations that might bind them to their shareholders in a business with the help of an M&A advisor.
It is subject to provincial or federal laws when a company is incorporated, dependent on the selected jurisdiction, and the right of possession of this distinct legal object that is the business is exercised through the holding of shares. In other words, the shareholders are the “owners” of the company. I sometimes hear, in the perspective of my training, horrors such as: “I understand that we are three owners, but they are my childhood friends, we have understood each other for twenty-five years. We do not require the agreement of a shareholder.
Everyone is honest, and everyone is of their word until proof to the contrary. However, when it comes to money or business, conflicts of all kinds can arise, and even close or related people are not immune. Without such a precaution, a dispute between shareholders can escalate, spiral out of control, and ultimately cost thousands of dollars in consulting and legal fees.
Several different goals can be targeted when drafting the document: reducing the powers granted to the directors and at the same time, increasing those of the shareholders, making sure within the company the care of a relative property of the shares, even upon leaving or the entrance of a new shareholder, prevent shareholders from selling their shares to third-party purchasers, and more generally, protect the financial interests of shareholders and the prosperity of the company in the medium and long term.
Among the most common clauses is that of the “right of first refusal”. If one of the stakeholders desires to sell his stakes to a third party who is not an investor of the company. The latter ought to first offer them to the investors already in position. Either in amount to their prior holding or at an individual mentioned in advance in the agreement. It is even feasible to give an order, such as to whom the bonds are first presented. And in the issue of rejection by this recipient. Who might be the next to choose. Of shares that are provided for in the capital stock of the company.
Other situations outside the shareholder’s control might occur. In addition to going out of the company for several purposes: death, disability, bankruptcy, illness. Fraud or theft within the business, absence, violation of a commitment between investors, etc. The existence of one of these circumstances can start an automatic deal made to the outstanding stakeholders. Who should obtain them or even an offer to the business itself which can purchase back the stocks of the investor who leaves the business.
A host of other clauses may be provided, including the obligation of each shareholder to take out an insurance policy on his life, with the other shareholders as the designated recipient, such a strategy permitting the surviving investors or even the business to exchange shares of the dead shareholder straight from his estate through M&A advisory. Clauses providing in advance the mechanisms used to establish the sale or purchase price of the shares are also essential. And several options are possible, if the said section delivers a fair, quick. And effective process, leaving no doubt about its understanding.
A relative exclusivity of the market for the holders of shares of the company. Clauses of a tax nature and dealing with the rights. And obligations of shareholders in given situations finally complete the varied range of possibilities. This agreement should, all in all. Settle down in advance any contradictory position or any issue likely to start changes within the business.
Finally, be aware that each shareholder agreement has its personality. And revised as needed during major changes within the company. Therefore, beware of standard templates where you only have “blanks” to fill in. A badly written agreement will upset you more than it will assist you. Properly protect your rights: consult a specialist in the matter and consult your notary.