Shareholders' agreement and withdrawal from the business

Incorporation of professionals
May 13, 2021
Certificated or uncertified shares?
June 5, 2021

The shareholders' agreement is a very important document when several people (at least two) decide to join together and run a business through a corporation. The agreement will be, in a way, like a marriage contract.

Several elements are usually included in the shareholders' agreement. This article focuses on the business withdrawal clauses.

In the absence of any agreement, the shareholders of the company are only obliged to pay for the subscription of shares. They may be entirely disinterested in the affairs of the company, and expect only a return on their initial investment (which is usually a minimum amount, e.g. $100). The shareholders' agreement allows conditions to be attached to the holding of shares, and should certain events occur, the shareholder will be obliged to sell his shares to the other shareholders.

For example, it is generally provided that if the shareholder ceases to perform the duties he or she has undertaken to perform on a full-time basis, the compulsory buy-sell mechanism will be triggered and he or she will have to dispose of his or her shares. The role and functions of each person can also be specified in writing in advance in the same agreement, in order to avoid a potential dispute about what each person has promised to do in the operation of the business. Withdrawal from the business may also be triggered by disability, bankruptcy, an act of fraud or embezzlement of company funds, or breach of a non-competition clause.

The method by which the sale price of the shares is calculated is also provided for in the shareholders' agreement. The shareholders are usually allowed to set the value of the shares themselves each year in a document provided for this purpose. Alternatively, if the shareholders do not set a value, different mechanisms for determining the value exist. For example, the company's accountant could be appointed as the person to determine the fair market value (or book value, if applicable).

In order to discourage wrongdoing, such as fraud against the company or competitive acts that run counter to the agreement, it is possible to provide for a penalty on the value of the shares when the withdrawal from the business arises from these reasons.



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