Shareholder agreements made simple
In advising a client on updating a Shareholder Agreement, I spoke to lawyer Jordan Dolgin, LLB a seasoned corporate lawyer with deep insight.
His first piece of advice was “there is no one-size-fits-all shareholder agreement”.
Not surprisingly, they come in all shapes and sizes and, to be meaningful, they should be tailored to your company and the particulars of its current (and possibly future) shareholders. Some are very complex and go on for 40 pages (or more). Some are basic and short. But they all function as an “operating manual” for your company and essentially deal (or try to deal) with two very simple concepts: control; and liquidity.
80 per cent of the content of all private company shareholder agreements attempt to strike a balance among the shareholders in terms of how various levels of corporate decisions are made (i.e., control); and how and when shareholders are permitted to “exit” (i.e., liquidity).
In fact, most of my time advising on shareholder agreements (whether I’m helping to put an agreement in place or helping to resolve an ongoing dispute) concentrates on issues of control and/or liquidity.
Mr. Dolgin advised that understandably, some clients are reluctant to embark on the whole “shareholder agreement process”.
They view it as a huge albatross that will suck up valuable start-up time and money.
However, in my experience, the utility of a shareholder agreement is to forecast probable future events you and your fellow owners will likely need to address and establish efficient ground rules from the outset.
The key is to avoid (A) trying to make up the rules as you go or (B) merely relying on corporate law statutory default rules, both of which may contribute to an expensive and messy future corporate divorce.
As my Grandmother used to say “Everything in life has a beginning, middle and unfortunately (or sometimes fortunately) an end and you should try and plan for the end when you’re still in the beginning.”
If you want to greatly simplify the shareholder agreement process, here are some friendly words of wisdom:
1. Shareholder agreements work best assuming you did a good job of picking suitable partner(s) in the first place. This decision (i.e., selecting good partners) is paramount and critical. A shareholder agreement will not save a bad partnership. only help reduce the time and cost of your eventual shareholder dispute/breakup.
2. Work towards “Forecasting the Probable”, i.e. understand the most common control and liquidity issues that are typically addressed and decide if they apply to you and your company. Dolgin has a user friendly Shareholder Agreement Checklist on his website. Do not put this off. The best time to deal with shareholder agreement issues is when you’re still in the “honeymoon phase” of your new business and values are relatively low and bargaining power among your shareholder group is relatively equal. Three years later all of this can (and likely will) change and the odds of circling back and putting an agreement in place once things get really busy with your new business drops off dramatically
3. If you don’t think you have the time or the patience or the money to implement a “comprehensive” shareholder agreement, you do have other options. In some cases (with a “green light” from your lawyer first), it may be OK to have all shareholders simply sign a basic “shot-gun” agreement. While not comprehensive, a “shot-gun” agreement (which is a specialty form of shareholder agreement) may have some value to your group and be useful in the event future irreconcilable differences arise and you need rules to Part Company without starting a war
4. Once you identify and decide upon the scope of issues relevant to include in your tailored shareholder agreement, ask your lawyer for a “fixed price” to prepare the first draft. This will help with your internal budgeting and manage legal costs.
5. Lastly, if you have a large shareholder group (i.e., three or more shareholders), someone (probably you) must be the “quarterback” and coordinate all comments so your lawyer has a single point of contact. Obviously, if your lawyer has to field lots of phone calls and emails from many different shareholders, the legal costs for this project can and will unnecessarily escalate.
Jordan Dolgin closed by saying that if you follow the above process and bear in mind the concepts shared above, you’ll go a long way to keeping the creation and implementation of your shareholder agreement “simple”.
Mark Borkowski is president of Mercantile Mergers & Acquisitions Corporation. Mercantile specialize in the sale of privately held companies sold to strategic and private equity buyers. Mark can be contacted at mercantilemergersacquisitions.com
Jordan Dolgin, LL.B. is Founder & CEO of Dolgin Professional Corp. A Business Law Firm. He can be contacted at jdolgin@dpcLAW.ca