This is an agreement that is signed by (some or all) of the shareholders in a company and that specifies the terms and conditions of their partnership. Among others, it covers points such as signing authority, company decision-making and the shareholders’ exercise of the right to vote, the distribution of shares, the dilution of shareholding, tax incidence in the case of death or disability, shareholder withdrawal, the right of first refusal, the drag along right (or forced exit clause), the reverse drag along right, conflict resolution, and the commitment to non-competition, non-solicitation, and confidentiality.
When a firm (a joint stock company) has more than one shareholder, it is highly advisable for the shareholders to have a formal agreement (a contract) between them that establishes the general rules for the functioning and the organizational structure of the business, for the relations between shareholders, and for their contractual commitment to the firm. The goal of this agreement is to specify in advance the actions that must be undertaken in various situations. Thus, among other things, it describes the mechanisms for the withdrawal, the separation, and the expulsion of a shareholder that are used to avoid disagreements between shareholders.
Here are the definitions of some of the terms used in shareholder agreement:
- Right of first refusal: This is a mechanism that grants a right of priority to other shareholders for the purchase of shares when a third party offers to buy them.
- Drag along right: This is a right granted to majority shareholders that obliges minority shareholders to sell their shares to a third party if the purchase offer of this third party is for the acquisition of a certain percent (often 100%) of the company’s shares.
- Reverse drag along right: This is a right granted to minority shareholders that obliges a third party to purchase the shares of a minority shareholder when the purchase offer of this third party is for the acquisition of a certain percent of the company’s shares.
To learn more, visit the Desjardins webpage “What is a shareholder agreement” or see the information brochure for entrepreneurs (in French), “Votre convention entre actionnaires,” which the Fondation du Barreau du Québec published in collaboration with Éducaloi in 2016.
Nathalie Gagnon and Caroline Lapointe, (BCF s.e.n.c.r.l.), “Convention entre actionnaires et stratégies de transfert d’entreprise,” APFF, November 27, 2003.