The short answer is yes.
The majority of Canadian businesses are family businesses. One recent study done in conjunction with the Institute of Corporate Directors and University of Toronto, Rotman School of Management, states that 54% of first-generation businesses have shareholders’ agreements, while 82% of second-generation businesses do as well. You can search for this study by its title: Private Family Enterprise Governance Survey: Why Family Business Success Matters for Canada.
One risk to small and medium family business owners is that they often do not realize that they should have a shareholders’ agreement in place.
1) Why do you need a shareholders’ agreement at all?
A shareholders’ agreement does many things, such as:
- Protects the rights of minority and majority shareholders
- Sets up governance
- Clarifies management responsibilities: For example, is this a special shareholders’ agreement where the shareholders take on the fiduciary duties that normally are the legal duties of the directors of the company (through a unanimous shareholder agreement)?
- Sets out how shareholders can or must part ways: For example, can they sell their shares? Can they sell to anyone? Can they buy shares from other shareholders? What prices will the shares be valued at, and how is that price determined? Can they ever be forced to sell?
- Provides for what happens if a shareholder dies
2) Why do family businesses in particular need one?
As noted above, he majority of Canadian businesses are family businesses. The first generation are the founders, the second generation may be the children of the founders, and by the third generation, if the business survives, outsiders may join. A shareholders’ agreement is considered an important component of corporate governance and business management for a growing business.
For smaller family-run businesses, imagine if there was a family dispute that had the potential to spill over into the family business, such as a divorce of two spouses who run it together. How would the business survive?
3) Consider the following scenarios: Would you be prepared?
- If you and your spouse get divorced, do you want to keep running the business together? Or should there be a process to determine which one can buy the other one out?
Parents and Children:
- What happens in the transition from the first generation to the next? Will the adult children run the family business along with their parents? Will the adult children’s say be equal to the parents? Or will the parents, in their role as founders, be “more equal” than the adult children when it comes time to vote or manage the business?
- What are the family’s plans for the business? What if the adult children all have shares, but only one of the children will be running the company? Can that shareholder buy out her siblings? If so, at what price? Who determines the price? Could she force her siblings to sell to her? Or could they buy her out instead?
- What if you and your sister have a business together, and she gets a divorce. Would you be ok with her former spouse getting half of your sister’s shares as part of their divorce settlement, and then running the business with them? Would this be good for the business? Would it be good for family relations?
- On a related note, often shareholders’ agreements among non-family businesses require that if a shareholder is getting a divorce, she sells her shares back to the company or to other shareholders rather than risk that they will have to run the business with the ex-spouse.
The best time to have these discussions is when everyone is on friendly terms. This blog post is a brief look at this topic; there are also many other aspects to consider when drafting a shareholders’ agreement, such as issues relating to tax, family, and wills and estates law.
Amee Sandhu has been a business lawyer in Ontario for 20 years. She created Lex Integra Professional Corporation in 2019 and focuses exclusively on business law and corporate ethics.
In her current practice Amee advises clients on commercial, corporate, integrity, anti-corruption, ethics and compliance, and supply chain risks.
Understand your risks. Perform with Integrity.
The purpose and contents of this blog is to provide information only, and it does not constitute legal advice. Reading this blog does not create a solicitor-client relationship between the reader and Amee Sandhu or Lex Integra. It is recommended to engage (hire) a lawyer if you require or are interested in legal advice.
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