When you start a company with friends or trusted colleagues, a shareholder agreement can feel unnecessary, even a little awkward. Everyone gets along, everyone is excited, and nobody wants to talk about what happens if things fall apart. But that’s exactly why the agreement matters. It’s far easier to agree on the rules while everyone is on good terms than in the middle of a dispute.
In Ontario, a corporation’s articles and bylaws set out the basic rules, but they don’t deal with most of the personal issues between owners. That’s the job of the shareholder agreement. Here are the clauses we think every co-founder should understand.
Who decides what
Start with control. Your agreement should spell out who sits on the board, how directors are appointed, and which major decisions need more than a simple majority. Selling the business, taking on significant debt, issuing new shares or changing the business direction are common examples of decisions that may need unanimous or special approval. Clear decision rules protect minority owners and stop a single shareholder from steering the company alone.
It’s also worth planning for deadlock. If two equal owners disagree on something fundamental, what happens? Some agreements use mediation or arbitration. Others use a buy-sell mechanism, sometimes called a “shotgun” clause, where one owner names a price and the other must either buy or sell at that price. It’s a powerful tool, but it can favour the owner with deeper pockets, so it needs careful thought.
What happens when someone wants out
People leave businesses for all kinds of reasons: a new opportunity, burnout, illness, or a falling-out. Your agreement should say how an owner can sell their shares and to whom. A right of first refusal usually gives the remaining owners the first chance to buy before an outsider can. Tag-along and drag-along rights deal with a sale of the whole company, protecting minority owners and making it easier to complete a deal.
The agreement should also cover death and disability. Many owners fund these buyouts through life or disability insurance, so the remaining owners can afford to buy the shares and the family receives fair value.
Valuation and vesting
Arguments about price are behind many shareholder disputes. Agreeing in advance on how shares will be valued, whether by formula, an independent valuator or another method, removes much of the conflict.
For start-ups, vesting is just as important. If a co-founder leaves after six months, should they keep a large stake in the business everyone else is still building? Vesting provisions let founders earn their shares over time, which keeps everyone committed.
Protecting the business itself
Finally, think about confidentiality and competition. It’s common to include obligations that stop a departing owner from using company secrets or soliciting clients and staff for a period of time. In the context of business owners, rather than employees, these restrictions are often easier to enforce, as long as they’re reasonable.
Get it done before you need it
A shareholder agreement is one of the best investments a new company can make. Our article on corporate governance and preventing boardroom disputes explains why structure matters, and if things have already gone wrong, read about resolving partnership disputes without going to court.
Our Mississauga business lawyers and corporate law team draft shareholder agreements for companies across the GTA.
