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The Shareholders' Agreement in a Private Corporation

As Alberta's economy continues to grow, many people are starting new business ventures, either by themselves or in partnership with others.  Most people, when planning to go into business with friends, family, or even strangers, will carefully make the choice of setting up their business either through incorporation or partnership, usually after consulting a lawyer or accountant.  Unfortunately, many people fail to consider just as carefully the problems that can occur as a result of going into business with others; problems that may not be apparent and may not arise for several years. 

For example, assume for a moment that 3 people agree to incorporate a company and be equal shareholders in this new venture.  They then start up a business that all 3 participate in operating.  What would happen if one of the shareholders passes away?  The other shareholders of the corporation may suddenly find themselves in business with a relative of the deceased shareholder.  Not a particularly attractive situation, especially if the deceased shareholder performed important tasks in relation to the business of the company.  Also, the new shareholder may not have the same visions for the company as the original shareholders, creating havoc for the company and the other shareholders.  Even assuming that the new shareholder wanted to sell the shares of the corporation to the 2 remaining original shareholders, the original shareholders may not have the funds necessary to purchase the shares.

A business relationship can be like a marriage - it usually starts with good intentions, but divorces do happen.  As a second example, assume there is a small business corporation with 2 shareholders, and one of the shareholders decides that he or she is no longer happy with the way the business is being operated and wants to make changes, which the other shareholder refuses to do?  How does the shareholder get out of the situation if he or she wants to sell their shares in the company and start a new business?    Private corporations have restrictions on share transfers, and therefore it may be difficult, if not impossible to transfer the shares to a third person.  Selling the shares to the other shareholder may either not be an option, or possible only at a severely discounted rate. 

Third, what if the unhappy shareholder felt that he or she could run the company better without the other shareholder and wanted to have control of the corporation by owning all the shares?  The desire to get rid of a shareholder can also happen where one of the shareholders is not performing up to expectation and, in effect, realizing profits on the backs of the other shareholders.  How do the other shareholders rid themselves of the problem shareholder?

For those who do incorporate and wish to take pro-active steps to address issues such as these, an agreement known as a Unanimous Shareholder's Agreement ("USA") can prevent the potentially costly and crippling results of these problems.  The USA is, as the name implies, an agreement between all the shareholders of a corporation.  A properly structured USA will address these and many other issues that shareholders of a small business corporation could encounter.  Life insurance, shotgun provisions, a right of first refusal, and other understandings agreed to in advance are all designed to avoid misunderstandings later.  The livelihood earned by shareholders of a small business corporation can be destroyed by one incident, but a properly structured USA can act like an insurance policy against a number of shareholder ills.  Proper planning now will reduce the aggravation and costs later.   

By Tom Langford
April 2, 2003