Dangers of Not Having a Shareholder Agreement

Contact Neufeld Legal PC at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Not having a unanimous shareholders agreement can prove extremely dangerous for the corporate stakeholders, given the investment that they will be making in the advancement of the company.

The rationale for undertaking a unanimous shareholders agreement potentially includes the following elements:

• Insuring continued commitment of the principal shareholders to the business’ advancement.

• Enabling the company to grow and obtain financing, through a structured approach.

• Allowing for the retention of top talent, allowing remuneration to be pushed back and be based in part on their performance and contribution to the company over the foreseeable future.

• Allowing for an exit strategy, both in circumstances where there is a desire to undertake an exit (one’s own or the ouster of another shareholder) and where circumstances make an exit the appropriate course of action (i.e. death, disability, personal circumstances).

• Provide a mechanism to capitalize on buy-out opportunities where there is substantial value in the proposed purchase price.

• If someone reduces their efforts in the company, have a mechanism to address this reduction (either by way of reducing their share position or reducing their allocation from the dividends that are being paid out), as opposed to the current system which has no such controls.

• Maintaining and strengthening the reputation of the company. The potential dangers of not having a unanimous shareholders agreement could include the following:

• The company may lack a clearly established growth strategy and as such could more easily be eclipsed by its competition.

• The company’s reputation, both externally and internally, may falter.

• The commitment and energy of shareholders might move in a negative direction, as opposed to being incentivized to move forward.

• Key talent may either be lost or be over-paid, without the means to defer a portion of the pay and tie it into their productivity.

• Key talent could move to the competition or become the competition, as they don’t see a comparable incentive to remain with the company.

• Increased possibility of client loss with the greater potential of key talent departing the company.

• No defined exit strategy for any of the shareholders, which in turn devalues their shares and their incentive to grow the company.

• No defined means to capitalize upon opportunities available to the company.

However, simply having any shareholders agreement is not of itself sufficient to attain the expansive benefits and protections from such a contractual arrangement, as there is a significant difference between your generic / boilerplate unanimous shareholders agreement and a customized unanimous shareholders' agreement.

For knowledgeable and experienced legal representation in negotiating and drafting a shareholders agreement that advances your business interests and those of the corporation, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

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Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.