Disputes between shareholders sometimes have serious
consequences for a business corporation and can be an impediment to
the carrying on of the operations in the ordinary course of
business. Such disputes are usually complex and costly while also
being protracted in nature. In this context, a well‑written
shareholders' agreement that is tailored to the business can
help to avoid disputes or, at least, limit their scope and provide
a framework for managing them.
Shareholders' agreements may not age well over time. They may
not evolve in sync with the business and its shareholders,
particularly in a context of expansion and growth. Furthermore, it
is generally difficult to change a shareholders' agreement once
it has been signed, and an attempt to change the ground rules in
midstream could be a source of additional conflicts between the
shareholders. It is therefore imperative for the shareholders to
establish their rights and obligations, as well as those of the
corporation, in a shareholders' agreement as early as possible
in the life of the corporation.
No one will be surprised to learn that money is the main cause of
disputes between shareholders, whether it is the money invested (or
to be invested) in the corporation or money that the corporation
pays (or will pay) to its shareholders in the form of dividends or
otherwise. At the same time, the shareholders' contributions in
property, services, time and money often create friction within the
corporation, particularly since the shareholders' business,
financial and other expectations may evolve differently - even in
opposite directions - over time.
Apart from financial issues, personal conflicts can also inflame
the relationship between the shareholders, especially when family
members are involved with the business. The same is true when
decisions are to be made on the global objectives of the
corporation and strategic issues.
In addition, if the corporation has shareholders from different
jurisdictions, cultural differences can also give rise to tension
between the shareholders. In such cases, the text of the
shareholders' agreement must be very explicit and should, if
possible, be supported by concrete examples of the application of
the more complex clauses, such as valuation of the shares and the
procedure for exercising a right of first refusal. In all cases, it
is essential to provide for the order of priority for the exercise
of the various rights, remedies and mechanisms contained in the
agreement to avoid adding issues of interpretation of the agreement
to the existing business issues.
It is often at times when the business of the corporation is not
faring so well that the common disagreements between shareholders
tend to flare up and lead to litigation. The shareholders'
agreement should therefore anticipate the future situations which
the corporation may face, whether positive or negative, such as
refinancing, the arrival of new shareholders, family succession,
the acquisition or sale of a business, international expansion, the
development of new markets, and retirement from the business.
The ability to anticipate future developments takes on its full
importance when one considers the context in which the
shareholders' agreement is being entered into. Thus, the
shareholders' and drafter's objectives may be different in
the case of an agreement concluded for tax and estate planning
purposes versus an agreement dealing, for instance, with the
arrival of a new investor, a transaction for the acquisition of the
business (e.g., business transfer or succession) or a
start‑up situation. Even in a very particular context such as
this, the shareholders' agreement should still give the
corporation and its shareholders the means to achieve their
ambitions and the requisite flexibility to carry out all their
business projects.
In addition to their status as shareholders, the shareholders may
also hold several other titles or functions in the corporation,
since they often also act as directors, officers and employees.
Disputes may therefore arise as a result of these different roles
and the associated rights and obligations, and degenerate very
quickly into personal disputes.
The drafting and negotiation of a shareholders' agreement is a
complex and exacting exercise requiring both legal and practical
experience. Thus, a review of the cases in the courts shows that
disputes pertaining to the most complex terms and conditions of the
agreement, such as the mechanisms for the arrival and departure of
shareholders and transfers of securities (right of first refusal,
purchase and sale (shotgun) clause, etc.) as well as interpretation
of non-competition, non-solicitation and intellectual property
provisions, are among the subjects most frequently debated in the
courts.
Valuation mechanisms for assessing the price of the shares in
different situations should also be clearly established in the
shareholders' agreement. Such mechanisms should oversee and
govern any discussions on the value to be attributed to the shares
of the corporation in the context of a sale or transfer, including
in complicated situations where there are ongoing disputes among
the parties.
Lastly, it is fundamental to provide for effective conflict
resolution mechanisms tailored to the needs of the parties (
confidentiality of the process, cultural and linguistic factors,
obligation to pursue the operations of the business as a going
concern in spite of the dispute, etc.) that allow for action to be
taken quickly to preserve the value of the business. This will
enable the parties to avoid the forced liquidation of the business,
with its disastrous consequences for the employees, suppliers and
clients.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.