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Shareholder Agreements: A Path Forward!*

In a small business context, it is very common for more than one individual to own a significant portion of the corporation.  For example, two individuals may each own 50% of the corporation’s shares or three individuals may own 1/3 of the shares of the corporation, etc.  As shareholders of the corporation, it is important that you turn your attention to such issues as: how the corporation will be governed, rights regarding the issuance of new shares or sale of shares, how the shareholders can terminate their relationship in the event of a conflict, and how the shareholders will govern themselves after leaving the corporation.

How can the foregoing issues be adequately addressed? A Unanimous Shareholder Agreement.

Forms & Types of a Shareholder Agreement

There are various forms of shareholder agreements.  At its simplest, a shareholder agreement is an agreement amongst one or more shareholders governing the relationship between the shareholders in relation to the Corporation. 

A more powerful and specific form of a shareholders agreement is a unanimous shareholder agreement.

What is a Unanimous Shareholder Agreement?

Pursuant to the Ontario Business Corporations Act and the Canada Business Corporations Act, a unanimous shareholder agreement is essentially an agreement entered into by all shareholders of the corporation which restricts the powers of the Directors to manage and supervise the corporation.

Therefore, all shareholders of the corporation must be a party to the agreement and the powers of the Directors must be restricted by the agreement.

Aside from its definition, what makes a unanimous shareholder agreement unique is the legal status that has been granted to a unanimous shareholder agreement. The law has elevated the status of a unanimous shareholder agreement to the level of a constating document of the Corporation.  In essence, a unanimous shareholder agreement is on par with the Articles of Incorporation.

Features & Benefits of a Unanimous Shareholder Agreement

The benefits of a Unanimous Shareholder’s Agreement are vast, and include the ability to:

  • Increase or decrease the voting threshold for directors’ and shareholders’ meetings;
  • Address repayment of Shareholder Loans;
  • Shareholder rights regarding the Issuance of Shares;
  • Exit Strategies for shareholders, including: Rights of First Refusal, Piggy-back rights, and shot-gun clauses;
  • Non-Competition, Non-Solicitation, & Confidentiality Clauses.

Next Steps for the Small Business Owner

It can be overwhelming for many small business owners to envision all the various scenarios outlined above.  Indeed, it can be even more daunting to have to consider the scenario that would see a shareholder leaving the corporation, especially at the start of the business venture.  However, it is precisely at this time, when the relationship is amicable, to address the matters included in a unanimous shareholder agreement.

In essence, a unanimous shareholder agreement is a proactive rather than a reactive measure.  It allows the shareholders of the corporation to have a document to govern their conduct as shareholders so the Corporation can focus on financial success!

Stay tuned for the next blog posting on how to sell your business and recoup the fruits of your labour….

 

*Please note that this is not intended to be legal advice, but a general, non-comprehensive discussion.

 

Incorporating a Business…Let’s get it right from the start!*

After careful thought, consideration, and the appropriate advice, you’ve decided to incorporate your business – Congratulations!  For many small business owners it’s an exciting time to be able to start the process of operating your business as a corporation.

So where does the small business owner start?  Read on…

The Articles of Incorporation

This document is the foundation of the Corporation.  This document describes the name of the corporation, limits on the business activity, the first directors, the types and quantity of shares a corporation may issue its shareholders, whether it’s a federal or provincial incorporation, etc.

Once the Articles are filed with either the federal or provincial government, a Corporation is born. But this is not everything.  We’re just getting started!

Some small business owners may think that once the articles are filed and the appropriate level of government has issued a Certificate that nothing further is required.  Why is this not the end of the process? My response – who are the shareholders? What are the rules that govern the corporation? Who are the officers? (i.e.: President, Treasurer, Secretary, etc.).  Many small business owners, especially those that are sole owners of the business will respond to my questions and say “Well, I am”.   However appropriate documentation is required to prove that such role exists.

Organizational Resolutions & Documents

These are the blueprints of the Corporation. These include: By-Law(s) – which deal with the general operating matters of the Corporation; the First Director Organizational Resolutions –which deals with the approval of by-law(s), allotment and issuance of Shares, appointment of Officers, determining the fiscal year end of the corporation, etc.; and the First Meeting of Shareholders’ Organizational Resolutions – which deals with approving the by-law(s), electing directors, appointing auditors or accountants, etc.

Once the above documents are executed – where do they go?  Read on…

The Minute Book

The Minute Book is the filing cabinet of the Corporation.  What is a minute book? And why is it important?

I describe a Minute Book as an autobiography of the corporation.  It provides the life story of the corporation.  The Minute Book is important for several reasons.  The law requires the contents of the minute book to be updated on a regular basis.  Near and dear to the hearts of many small business owners is the prospect of selling your business in the future for a sizeable profit.   Well, guess what? Any buyer of your business will be advised by their legal counsel that the minute book be examined.  If there are any issues or concerns, this may delay or hinder your business deal.

So where does this leave the small business owner? It is highly advisable to reach out to a lawyer knowledgeable in business/corporate law and have them assist you in establishing a Corporation and effectively maintaining a Minute Book.

After all, for almost all small business owners your business is the beginning of your road to prosperity – so let’s get it right from the start!

Stay tuned for the next blog posting on the role of shareholder agreements and why these are critical to the proper functioning of a small business…

*Please note that this is not intended to be legal advice, but a general, non-comprehensive discussion.

Do I really need a Will?

Since Chera Law Firm opened its doors in October, clients and prospective clients have asked the question “do I really need a will”.  The short answer is…it depends.  Some of the key factors impacting the decision are your marital status, if you have children, the nature and ownership structure of your assets, and the value you place on the benefits of having a Will.  As a result, a careful examination of your circumstances is required to provide the appropriate advice.

However, what we can tell you is that in the absence of a Will, Ontario law provides that your property (i.e. assets, possessions, etc.) will be distributed pursuant to a ranking system contained in Part II of the Succession Law Reform Act.  The ranking system distributes your property to certain family members depending upon the nature of your relationship.

For example, if you are married with one child and the net value of your property exceeds $200,000, in the absence of a Will upon your death the first $200,000 of the net value of your property would go to your spouse with one half of the remainder going to your spouse and the other half to your child.  For many this may be an unacceptable result as many spouses prefer that their entire property pass to the other spouse and only upon the death of the remaining spouse shall the property pass to the child.

Moreover, the Provincial Government would be entitled to your property in the event that the family members referred to in Part II of the Succession Law Reform Act do not exist.

Therefore, aside from asking whether a Will is needed, individuals without a Will should also be asking themselves “what amount of control do I want to have over the distribution of my property upon my death?”  Do you want to decide or do you want a formula provided under the Succession Law Reform Act to decide? A carefully drafted Will can provide an individual with greater control and certainty of how one’s property will distributed upon their death.

Wait…there is more!  Control is just one of the benefits associated with having a Will.  Additional benefits include:

  • the ability to influence who will have guardianship over your minor children;
  • cost savings, such as the potential to avoid incurring estate administration tax (probate fees);
  • simplifying the administration of your estate;
  • reducing the potential for family in-fighting over assets;
  • ensuring that the appropriate legal and financial structures, such as a trust, are in place to provide for your children and/or spouse in your absence.

How can Chera Law Firm help?

First, we can provide a consultation to discuss the benefits of a Will and the implications of not drafting a Will in your particular situation.  Second, we have the proficiency to carefully draft a Will that will provide you value and peace of mind.

If you have any questions or comments, please contact Jatinder S. Chera.

*Please note that this is not intended to be legal advice, but a general, non-comprehensive discussion.

Welcome to Chera Law Firm!

It is with immense gratitude that I announce the dream of having my own practice has come to fruition. I am incredibly grateful for the support of my wife Enilum, my parents Sardara and Kuldip, my siblings, and my friends without whom Chera Law Firm would not exist.  They encouraged me, challenged me and listened tirelessly to me as I shared my ideas of having my own law firm.

It is always a difficult decision to start your own business; the risk for many is at times overbearing.  However, in these very early days, I remain extremely optimistic that starting my own law firm was the best career decision for me.  I encourage any of my colleagues in the legal field to contact me if you ever want to discuss the decision-making process that I used in making my decision.

As I embark on this new adventure, I look forward to employing the principles of integrity, passion, and excellence as I work diligently and to the best of my ability in assisting individuals and families in the community with their legal matters.