0ne often neglected area of concern for private companies is formalizing the relationship amongst the owners. If the business is operated as a corporation, then the owners (known as shareholders) can enter into an agreement that deals with their shareholdings and with. management decisions. The expenditure of time and effort to reach a consensus on the rights and obligations amongst shareholders is a wise investment, since disagreement and ultimately litigation or arbitration can be enormously expensive and generate irreparable harm to the business. Unfortunately, when share- holders are trying to formalize their relationship they are faced with a dilemma, as one size does not fit all. The share- holders' agreement can be as varied and creative as the relationship itself. However, since the agreement tells the story of the relationship amongst the shareholders, it needs a clear beginning, middle and end. While there are other concerns that can (and sometimes should) be addressed, the following essentials should always be considered.

1. The Beginning

The agreement should specify the number and class of shares each shareholder holds and whether they have any options or obligations to acquire additional shares. The amount of interest and repayment terms of any shareholder loan should be specified. While the shareholders' agreement does not serve as an employment agreement, each shareholder's initial position as an officer and/or director should be identified and their attendant rights and obligations reviewed.

2. The Middle

Voting rights for each shareholder and the rights, if any, of the shareholder to nominate directors should be outlined. While provincial and federal legislation specify certain corporate actions that require either shareholder or director approval, shareholders' agreements usually identify additional corporate actions that require such approval or a higher threshold of approval than is stipulated by the legislation. The agreement also clarifies the fiduciary duties of the shareholders.

Are all shareholders obligated to focus all their time and attention on the business? Do some shareholders have outside and possibly competing interests which are acknowledged and accepted? Do some shareholders have a higher obligation because they are expected to be more active in the management of the business? The agreement should specify who has access to information as well as any obligations of senior management to regularly provide financial information. Finally, the agreement should deal with the division of annual profits and the mechanism for profit payment or withdrawal;

3. The End

All shareholders' agreements are written in the shadow of the termination of the relationship. In the absence of such an agreement, it is extremely unlikely that a quick, fair and manageable exit process will be reached between disputing shareholders. The agreement should provide purchase mechanisms, (including valuation and payment terms), for death, disability, insolvency or family dissolutions. Additional purchase mechanisms are often included to address the abandonment of the business by a shareholder or breach of material terms in the shareholders' agreement. The agreement should consider purchase and sale mechanisms for a shareholder who is trying to exit and for the corporation forcing a shareholder out. A process may also be included to allow a designated percentage of shareholders to accept terms of a sale to a third party. and drag along all other shareholders.

Shareholders should consider a shotgun mechanism, whereby one shareholder can initiate a process and set a price for the purchase of shares that will result in one or more of the shareholders having their shares purchased by the others.

Lastly, the agreement should include non-competition, non-solicitation and con- fidentiality provisions to protect against exiting shareholders attacking the value of the business. Forming a binding agreement that deals with all phases of the relationships amongst owners can reduce the chance for disputes and lessen the cost and impact when they do arise. Writing this agreement now ,can save a lot of time and expense trying to negotiate one later.

Ian Wick is a partner at the law firm of Keyser Mason Ball LLP, practicing in the area of corporate/commercial law, with a focus on Mergers/Acquisitions, Business Relationships, Financing and Investment. He can be reached at (905) 276-0425 or ianwick@kmblaw.com.

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