Personal relationships between shareholders and administrators

  • The shareholders are the company owners.
  • A common stock comprises 3 basic rights:
    1. The right to vote at the annual general assembly to elect the members of the board of directors.
    2. The right to receive part of the dividends of the enterprise, when applicable.
    3. The right to receive a percentage of the value of the liquidated assets of the enterprise, at the time of the dissolution of the enterprise.
  • A company can issue shares with more or less rights than the ones previously described. These shares with modified rights are called preferred shares.

 

It is extremely important for shareholders to get in touch with a lawyer to circumscribe their relationships with the other shareholders. The lawyer will draft a contract called a unanimous shareholder agreement which will be included in the minute book of the company.

 

  Here are some examples of clauses that are usually contained in a unanimous shareholder agreement:

 

  •          The right of first refusal

This clause compels the shareholder who wishes to dispose of his shares to offer them first and mostly to his associates before putting them for sale to third parties. This clause establishes a “pact of preference” which is essential for the retention of the proportionate detention of shares and of the company’s private status.

  •          Mandatory offer

The mandatory offer applies when the offer of the share sale is not dependant on the desire of the bidder. This clause’s goal is to protect the bidder’s associates, even if the bidder does not necessarily have the intention of selling his shares. This offer can be provided in the two following scenarios: a shareholder’s death or his withdrawal from the company’s business. The « withdrawal from the company’s business » can pertain to a variety of events, such as a violation of the non-competition or non-solicitation covenant or to any other commitment provided in the agreement, to the termination of employment at the company, to disability, to bankruptcy, to an absence (in accordance with the Civil Code of Quebec), to robbery, to fraud or misuse of funds, to a mortgage of his company shares without the consent of the other shareholders, the refusal or omission to comply to the convention’s provisions, etc.

The offer is mandatory and automatic in the event of the above-mentioned assumptions. The offer leads to the compelled share sale to the associates, who will have the option to purchase or not those shares. The mandatory offer can have various other forms than the ones mentioned above.

  •          Shotgun clause

This clause is somewhat the same as the first refusal clause as it stipulates that a shareholder offers his shares for sale to his associates, whether or not they want to buy hid shares. In addition, if the shareholders to whom the offer is made do not accept it, they have the obligation to offer their own shares to the bidder at the same price and conditions. This shotgun clause must only be used between two shareholders with the same amount or about the same amount of shares and which have a similar financial capacity. These shareholders are thus in an equal associates position, thus it may be presumed that a disagreement between them could lead to the company’s crash.

  •          Evaluation clause

The evaluation clause sets the price of the actions, whether it is from a sale due to a death or whether the sale is intentional or not, inter vivos.

This clause must allow for the establishment of the fairest price, which is least questionable.

Many evaluation techniques exist, such as the market value, the set market value, the performance value, the established value by a third party, the agreed value, etc.

  •          Insurance clauses

The buy-and-sell clause in the case of a death, where it is stipulated the automatic purchase of the deceased’s shares, is almost always accompanied by an insurance clause. The payment of the deceased’s shares is usually made from the proceeds of the life insurance policies, either by the other shareholders or by the company.

Some buy-or-sell disability insurance and serious disease insurance are available, which give to the beneficiary a lump sum that can be used to pay off the shares of a shareholder who becomes sick or disabled, or for a substantial downpayment on the shares price, in the case of an agreement which provided for the mandatory “business withdrawal” of a sick or disabled shareholder.

  •          The clause on the purchase by the company

In the cases where a shareholder must sell his shares to the company, the agreement buy-and-sell could provide that the purchase of the shares will be made by the company instead of by the shareholder’s associates. There is quite a difference between the two: selling the shares to the other shareholders will provide a capital gain or loss while selling the shares to the company which issued them will provide taxable dividends for the seller.

  •          Penal provisions

The penal clause discourages the shareholders to infringe on the agreement and simplifies the shareholders’ appeals.

First of all, the clause can set the penalty amount. The penalty can also be a price reduction on the shares of the faulty shareholder which must mandatorily be tendered for sale to the other shareholders.

  •          Society clauses

The “society” clauses determine the nature and scope of the shareholders’ participation in the operations and financing of the company, as well as the pecuniary interests that they could benefit from.

  •          Vote clauses

The “vote” clauses should prevent minority shareholders from participating in the administrative decisions of the company.

  •          Administration clauses

The “administration” clauses regulate in advance such domains as the administration, the operations and the financing of the company and will prevent the majority shareholders from setting aside the minority shareholders.

 

  • If there is a written agreement and should a dispute occur, the solution to the dispute will often be provided for in the contract. This will ensure that the dispute will not be legally enforced since the solution is provided in the contract.
  • Things that must be avoided:
    •         When two persons wish to do business together, it is important that the unanimous agreement of shareholders provide dispute resolution mechanisms or to agree to find a third shareholder.
    •         As a matter of fact, most companies with only two equal shareholders are indeed dissolved at the first disagreement, as there is no way to settle the dispute in favour of one or the other shareholder.
    •         It is incidentally for the same reason that it is strongly suggested to have a board of directors composed of an odd number of administrators.