What rules or processes do you have in place should you or another shareholder no longer wish to, or unable to participate in the business? Let’s explore the value of the unanimous shareholder agreement and how it can be a crucial strategy for both your personal financial well being and business management.
What is a unanimous shareholder agreement?
A unanimous shareholder agreement (USA) is an arrangement among the company's shareholders that outlines the obligations, privileges and protection of shareholders. A USA is separate from company bylaws and often includes matters that are not typically included in a corporation's bylaws. At the very least, a USA should make sure that shareholders are treated fairly and that their rights are protected in accordance with the agreement of each shareholder.
Why have a unanimous shareholder agreement?
Determining, in advance, the rights of each shareholder can save a significant amount of time, money and frustration whenever there are two or more shareholders of a business. A USA is not required in order to operate a business but it is strongly advised as part of a comprehensive plan for both your business and you as an owner. Having a well-drafted USA specifies aspects of the shareholders' relationship to each other and can provide clarity when unexpected or significant events occur.
The USA should set the expectations and rules about what happens when you or another shareholder no longer wish, or are unable, to participate in the business. However, a thorough USA will cover more than simply buy-sell provisions. For example, it can specify what outside parties may become future shareholders and provides safeguards for minority positions.
Consider some major life events that a shareholder might face resulting in the decision or requirement to leave the business: Death, disability, divorce, dispute or even simply by decision.
Death of a shareholder
In the case of death, what would happen to your business if one of the other shareholders were to pass away? Would that owner's spouse, or other family members, inherit the shares? If so, would you be able to work with them or run the business with them now being part of the ownership group? The alternative option might be for you to purchase the shares of a deceased owner. In this case, could you afford to do so at a fair price, in a reasonable time, without severely impacting your financial situation?
On the other hand, what would happen if you passed away? Would your spouse count on the business as a significant, or sole, source of their income? Would he or she be able and equipped to take your place in the business? Perhaps, you would want your shares to be sold to your business partners so that your spouse would have resources to fund their lifestyle when you are gone, rather than having to rely on the business. In that case, how would the remaining business owners raise enough capital in order to buy the shares from your beneficiary(ies)?
Similar issues arise when a shareholder becomes disabled, which is more likely to occur than death during an individual’s working years. In what capacity should a shareholder be involved, if he or she is no longer able to work because of a long-term physical or mental disability? Is it reasonable for them to continue to share in the profits of the company with little to no involvement? Or should the other shareholder(s) have the opportunity to purchase the disabled party’s shares?
Other situations to consider
Death and disability are just two common scenarios that a USA may cover. As noted above, there are numerous other circumstances under which shares of the business may be sold and a USA may also also address the following circumstances:
- The bankruptcy of a shareholder,
- Retirement or termination of employment,
- Seizure of a shareholder’s shares in a creditor dispute,
- The transfer of shareholder’s shares as part of a division of matrimonial property, or
- Purchase of shares by a third-party.
More key considerations around unanimous shareholder agreements
The essence of a unanimous shareholder agreement is to make decisions in advance for what could have significant impacts on the well-being of the business and shareholders. While by no means is this intended to be an exhaustive list, below are some examples of items that may be included:
- Management and governance of the business provisions,
- Rights and liability of shareholders,
- Buy-sell arrangements,
- Shotgun clause,
- Use of funds from insurance policy payouts,
- Confidentiality and non-compete clauses,
- Dispute resolution provisions such as arbitration,
- And much more.
Next steps: Seek out expertise tailored to your situation
It's difficult to anticipate every item that could bring conflict or dissension among business partners and shareholders. Still, a well-written USA can provide peace of mind knowing that potential situations can be avoided, or at least resolved to satisfaction. To learn more about the importance of a USA for your business, we recommend that you meet with your legal and tax advisors to identify key considerations around your unique situation and discuss next steps.
Once put in place, it’s important to review the agreement on a regular basis to ensure it continues to meet all parties’ needs. This should include a review of any related insurance coverages, as additional protection may be needed if the business is growing in value.
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