corner shadow

Shareholders Agreement Checklist

The main purpose of a shareholders’ agreement is to govern the relations between or among partners. This document helps lay the more important ground rules for managing the company and predefines important future decisions such as liquidity events. A solid shareholders’ agreement greatly reduces potential costly future conflicts.

The following checklist is a summary of the principal items usually covered in a typical shareholders’ agreement. It does not pretend to be complete; it is more of a layman’s view of items normally found in such a document.

  • Date.
  • Names of the parties involved including address.
  • For corporate shareholders, jurisdiction of incorporation and location of head office.
  • Authorized capital of the corporation including description of each class of shares.
  • Issued shares for each shareholder.
  • Definitions (for example: Fair Market Value, Book Value, Auditor, Offered Shares, Purchase Offer, Sale Offer, Vendors, Purchasers, etc.).
  • Number of directors.
  • Right to nominate directors.
  • Right to nominate officers.
  • Quorum.
  • Decisions of the board to be approved by majority (51%) or supermajority (i.e. 66%, 75%, etc.).
  • Right of veto in favour of minority shareholders.
  • Removal of certain decisions from directors to shareholders.
  • Shares cannot be transferred or sold to a third party unless it is offered to current shareholders except to holding company controlled by the shareholder or a family trust for example.
  • The company want to raise money. It first offers to existing shareholders the right to subscribe for those shares.
  • Dilution suffered equally by all shareholders or only by certain shareholders up to a certain threshold.
  • Description of mechanics for offer and acceptance and time frame.
  • Description of rights in the event a capital subscription is not entirely fulfilled by the shareholders.
  • Right of First Refusal: the right to acquire the shares for a selling shareholder under the same terms and conditions as a bona fide written offer received from a third party.
  • Shot Gun: a shareholder offer to buy the shares of another shareholder at a predetermined price. The recipient can elect to sell its share or purchase the shares at the offer price and conditions.
  • Right of First Offer: in the event that one or more shareholders desire to sell their share, it can deliver a selling notice to the other shareholders telling them they wish to sell their shares. The other shareholder will have the right to make a first offer. If the offer is deemed acceptable, the sale is consummated otherwise the shares are put up for sale and the sale can go through provide the price is above the first offer. The shareholder making the first offer lose its right of first refusal. This can also be used to sell 100% of the company.
  • Tag Along (Coattail Provisions): in the event a shareholder receive an offer and the right of first refusal is not accepted, the other shareholders will have a right to sell their shares to the same purchaser in the same proportion under the same terms and conditions.
  • Drag Along: the right for the majority of shareholders to force the sale of all the shares of the corporation in the event of an offer whereby the right of first refusal is not exercised.
  • Put: When one shareholder has the right at a certain moment in time, to require the corporation or other shareholders to repurchase their shares at a certain price (Fair Market Value, Book Value, Minimum Return on Investment, Pre-determined valuation formula, determination by auditors, etc.).
  • Call: When one shareholder has the right at a certain moment in time, to require one or more shareholders to sell their shares at a certain price (Fair Market Value, Book Value, Minimum Return on Investment, Pre-determined valuation formula).
  • Sunset Clause: In the event, no transaction giving liquidity has occurred within a specific time frame, then one or more shareholders have the right to direct the corporation to prepare and implement a disposal through an initial public offering or a sale.
  • Certain events will give the corporation the right to remove a shareholder or a shareholder to force the company to repurchase its shares. Example of such events are: death, incapacity, termination for cause, bankruptcy, theft, fraud, embezzlement, breach of obligations, resignation, retirement, court judgement, competition, etc.
  • The price payable varies depending on the nature of the events ranging from fair market value to a substantial discount. The terms of payment will be determined ahead of time.
  • In private companies, it is not rare to have insurance coverage on certain shareholders to provide the corporation with the funds required to repurchase the share of a deceased shareholder.
  • Non-compete for a certain territory and time frame.
  • Non-solicitation of employees, customers or suppliers.
  • Declaration of jurisdiction under which this agreement is interpreted and enforced.