In many ways the relationship between the shareholders of a
company is akin to that of a marriage. In both cases the parties
involved set out with the best of intentions but there are bound to
be both good and bad times as circumstances change along the way.
One can think of a shareholders' agreement as being equivalent
to a marital agreement for a company. You hope to never need it but
will surely be glad it's there in case you do.
During the initial honeymoon phase of operating a company, the
shareholders may be cruising along and on the same page with
respect to all important business decisions. The company may be
growing fast and it may even be starting to show a profit. In these
good times it may be difficult to see why a shareholders'
agreement may be needed. Things are working great now, why should
they change? Why do today what you can put off thinking about until
The unfortunate reality is that the vast majority of businesses
inevitably come across hard times at some point in their
development and as a consequence shareholder realities can change
in a hurry. At some juncture down the road it may simply be best
for all parties involved to "divorce" and move on. In
this scenario, being able to fall back on the guidelines
established in advance by a shareholders' agreement prepared
when cooler heads prevailed is much preferable to the
Putting in place a shareholders' agreement when things are
going well is far easier than trying to negotiate one in the future
at a time when relations between the shareholders might have become
strained. Failure to put such a framework in place can often lead
to very contentious litigation that is just as antagonistic as the
worst divorce actions. Litigation between shareholders can be
extremely time consuming and costly and, more importantly, can
easily cripple and ultimately destroy the underlying business.
One potential way to ensure that your company is not embroiled
in a long and drawn-out death dance once shareholder relationships
sour is to include some form of a compulsory buy-out provision in a
shareholders' agreement, the most well known and effective form
of which is the shotgun clause. The operating premise behind this
relatively simple and effective provision can be analogized to that
old fairness adage "I'll cut the pie and you choose a
half". Under the terms of a shotgun clause, a shareholder
desiring to offer all but not less than all of its shares in the
company (the "Instigator") may initiate the buy-out
process by giving notice to the other shareholder. This notice will
set out the terms, including the price, on which the Instigator
wishes to purchase the other shareholder's shares. Delivery of
the notice puts the ball in the court of the other shareholder who
is then granted the option to either sell their shares to the
Instigator at the per share price and on those certain terms
proposed by the Instigator, or alternatively to purchase the
Instigator's shares at that same per share price and on those
The primary advantage of a compulsory buy-out clause, such as a
shotgun clause, is that it provides certainty by putting in place a
procedure and, most importantly, a hard and fast timeframe for
resolving potentially devastating shareholder disputes. This
benefits all parties in that it ensures that the shareholder who
values the company most ends up with control of the company while
the other is compensated fairly for their interest, all while
preserving the value of the company as much as possible.
Just as marital agreements are today being utilized with
increasing frequency, shareholders agreements should be a must for
anyone considering entering into a corporate relationship with one
or more other parties. The cost of having your lawyer prepare a
shareholders' agreement will be an insignificant cost if it
prevents or limits a dispute down the road.
Mackrell International – Canada - Lindsay Kenney
LLP is a full service business law firm with offices in Vancouver
and Langley, BC and a member of Mackrell International. Mackrell
International – Canada is comprised of four independent law
firms in Alberta, British Columbia, Ontario and Quebec. Each firm
is regionally based and well-connected in our communities, an
advantage shared with our clients. With close relations amongst our
Canadian member firms, we are committed to working with clients who
have legal needs in multiple jurisdictions within Canada.
This article is intended to be an overview and is for
informational purposes only.
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