Shareholder agreements

In advising a client on updating a shareholder agreement, I spoke to lawyer Jordan Dolgin, a seasoned corporate lawyer with deep insight into the topic. His first piece of advice was that there is no such thing as a one-size-fits-all shareholder agreement. They come in all shapes and sizes and, to be meaningful, they should be tailored to your company and the particulars of its current (and possibly future) shareholders.

Some agreements are very complex and go on for 40 pages or more. Some are basic and short. But they all function as an operating manual for your company and deal (or try to deal) with two very simple concepts: control and liquidity. Most private company shareholder agreements attempt to strike a balance among shareholders in how corporate decisions are made at various levels and how and when shareholders are permitted to exit. In fact, most of my time advising companies on shareholder agreements (whether I’m helping to put an agreement in place or helping to resolve an ongoing dispute) concentrates on issues of control and/or liquidity.

Dolgin advises that some clients are reluctant to embark on the whole shareholder agreement process in the first place because they view it as a white elephant that will suck up valuable start-up time and money. But in my experience, the utility of a shareholder agreement is to forecast probable future events you and your fellow owners will likely need to address and establish efficient ground rules from the outset.

The key is to avoid trying to make up the rules as you go or merely relying on corporate law statutory default rules, both of which may contribute to an expensive and messy future corporate divorce. As my grandmother used to say, “You should try and plan for the end when you’re still in the beginning.”

Shareholder agreements work best assuming you did a good job of picking suitable partner(s) in the first place. This decision is critical. A shareholder agreement will not save a bad partnership. It can only help reduce the time and cost of your eventual shareholder dispute/breakup.

When crafting a shareholder agreement, work towards forecasting the probable. Understand the most common control and liquidity issues and decide if they apply to you and your company. Dolgin has a user-friendly shareholder agreement checklist on his website that can help guide your thinking at www.dpclaw.ca .

Do not put this off. The best time to deal with shareholder agreement issues is when you are still in the honeymoon phase of your new business. This is when values are relatively low and bargaining power among the shareholder group is relatively equal. Three years later all of this can (and likely will) change and the odds of circling back and putting an agreement in place once things get really busy drop off dramatically.

If you don’t think you have the time or the patience or the money to implement a comprehensive shareholder agreement, you do have other options. In some cases (with a green light from your lawyer), it may be OK to have all shareholders simply sign a basic shotgun agreement. In a nutshell, a shotgun agreement outlines a process whereby one partner can set a value on the company’s shares and the other partner(s) can decide whether to buy or sell at that price. While not comprehensive, a shotgun agreement may have some value to the group in the event of irreconcilable differences and allow partners to part company without starting a war.

Once you identify and decide upon the scope of issues relevant to include in your tailored shareholder agreement, ask your lawyer for a fixed price to prepare the first draft. This will help with your internal budgeting and manage legal costs. If you have a large shareholder group (three or more shareholders), someone (probably you) must be the quarterback and co-ordinate all comments so your lawyer has a single point of contact. Obviously, if your lawyer has to field lots of phone calls and e-mails from many different shareholders, the legal costs for this project can and will unnecessarily escalate.