Shareholder Agreements in Alberta: What to Include

When starting a business in Alberta with multiple shareholders, one of the most important legal documents you’ll need is a shareholder agreement. A well-drafted shareholder agreement can help prevent disputes, ensure that all shareholders are on the same page, and protect the interests of everyone involved.

In this article, we’ll walk you through the essential elements that should be included in a shareholder agreement and why having one in place is critical for the long-term success of your business.

What is a Shareholder Agreement?

A shareholder agreement is a legal document that outlines the rights, responsibilities, and obligations of the shareholders in a company. It establishes the terms under which shareholders interact with each other, as well as how the company will be managed. The agreement governs how decisions will be made, how disputes will be resolved, and what happens if a shareholder wants to sell their shares or leave the company.

While not legally required in Alberta, a shareholder agreement is highly recommended for businesses with multiple shareholders. Without one, your business may face conflicts or operational inefficiencies that could damage its future.

Why Do You Need a Shareholder Agreement?

A shareholder agreement serves several important functions, including:

• Clarifying Rights and Obligations: A shareholder agreement clearly defines each shareholder’s rights, duties, and financial interests in the company. This helps avoid misunderstandings and ensures that everyone is on the same page.
• Dispute Resolution: Conflicts among shareholders are common, but with a clear agreement in place, the process for resolving disputes is already established, which can save time and legal costs.
• Protection of Interests: The agreement protects shareholders by outlining what will happen if one shareholder wants to sell their shares or if the company is sold. This ensures that the interests of minority shareholders are protected.
• Business Continuity: In the event of death, disability, or retirement of a shareholder, the agreement provides guidance on how shares should be transferred or sold, ensuring business continuity.
  

Key Elements to Include in a Shareholder Agreement

A comprehensive shareholder agreement should address several key components to ensure the smooth operation of the company and the protection of shareholders’ interests. Below are the key elements that should be included in a shareholder agreement for businesses in Alberta:

1. Shareholder Rights and Obligations

• Voting Rights: Clearly define how voting rights are allocated among shareholders. This section should address whether voting rights are proportional to share ownership or if there are special voting classes of shares.
• Decision-Making: Outline how important business decisions (e.g., changes in company direction, mergers, acquisitions) will be made and what constitutes a quorum for decision-making.
• Dividend Policy: Specify how profits will be distributed among shareholders and whether shareholders are entitled to dividends.

2. Share Ownership and Transfer Restrictions

• Right of First Refusal: This clause gives existing shareholders the right to purchase shares from another shareholder before they can be sold to a third party.
• Drag-Along and Tag-Along Rights: These provisions protect minority shareholders by allowing them to sell their shares if the majority shareholders decide to sell the company (drag-along) or giving minority shareholders the right to join in on a sale (tag-along).
• Transfer Restrictions: Specify conditions under which shares can or cannot be transferred. For example, a shareholder may not be able to transfer shares without the consent of other shareholders or may only be allowed to transfer shares to family members or business partners.
  

3. Buy-Sell Provisions

• Triggering Events: A buy-sell provision outlines the circumstances under which shares will be bought or sold, such as the death, disability, or retirement of a shareholder, or a shareholder's desire to exit the business.
• Valuation Method: Define how the company’s value will be determined in the event of a sale of shares. Common methods include using an independent appraiser or following a pre-agreed formula.

4. Management and Governance

• Board of Directors: Detail how the board will be formed and the powers of the directors. The agreement should specify how many directors will be appointed, who appoints them, and how they will be removed or replaced.
• Management Roles: Outline the specific roles of shareholders who are involved in the day-to-day management of the company. This can help avoid confusion and clarify decision-making responsibilities.
  

5. Dispute Resolution

• Mediation and Arbitration: In the event of a dispute, include provisions for resolving issues outside of court, such as through mediation or arbitration. This helps avoid lengthy and costly litigation.

6. Confidentiality and Non-Compete Clauses

• Confidentiality: A confidentiality clause ensures that shareholders maintain the confidentiality of sensitive business information, even after they leave the company.
• Non-Compete: Include provisions that prevent shareholders from competing with the company for a certain period after leaving or selling their shares.

7. Exit Strategy

• Exit Planning: A shareholder agreement should address how shareholders can exit the company—whether through selling their shares, transferring ownership, or otherwise. It should also outline the company’s strategy for handling exits and the impact on the remaining shareholders.

When to Review or Update Your Shareholder Agreement

Your shareholder agreement should not be a static document. As your business grows and evolves, so should your agreement. Review and update your shareholder agreement regularly, especially when there are significant changes in your business, such as:

• Changes in ownership: New shareholders come on board or existing shareholders transfer their shares.
• Mergers or acquisitions: When the business undergoes a merger, acquisition, or significant restructuring.
• Expansion: If the business expands into new markets or offers new products/services.
• Shareholder changes: If shareholders retire, pass away, or otherwise leave the company.

Final Thoughts

A shareholder agreement is a critical document for businesses in Alberta with multiple shareholders. By addressing the rights and responsibilities of shareholders, outlining dispute resolution processes, and defining what happens if a shareholder wants to leave, a shareholder agreement provides clarity and protection for everyone involved.

At Libra Law, we specialize in drafting comprehensive shareholder agreements that protect your business and ensure that your company is set up for long-term success. Talk to a business lawyer today to ensure that your shareholder agreement is legally sound and tailored to your business needs.

Disclaimer:

This article is for general informational purposes only and does not constitute legal advice. For personalized assistance with your shareholder agreement, please consult a lawyer or qualified professional.