You start a business with a partner or two, split the shares, shake hands. The articles are filed, business is rolling. And the most important document in the relationship, the shareholder agreement, waits. Often for years. Sometimes until the day it becomes impossible to write.
The paradox repeats itself in countless Québec SMEs: the best agreements are drafted while everything is going well, and that is precisely when no one sees the urgency.
The applicable framework is the Quebec Business Corporations Act or the Canada Business Corporations Act, depending on the regime under which the company was incorporated, supplemented by the general rules of the Civil Code of Québec.
What is a shareholder agreement?
It is a private contract between the people who hold a corporation’s share capital. It supplements the law and the articles by settling what they do not: how shares may be sold, how major decisions are made, what happens when a shareholder leaves, falls ill or goes bankrupt.
When it is signed by all the shareholders, the so-called unanimous shareholder agreement can go even further: it can withdraw part of the directors’ powers and hand them directly to the shareholders. It is a powerful tool, one that lets you organize the corporation on your own terms rather than falling back on the general rules.
Why “too late”?
Because no one thinks about it at the start. They think about it at the first serious clash: one partner wants to sell, the other wants to reinvest; one works sixty hours a week, the other has drifted away from the business. At that stage, everyone negotiates with the brewing conflict in mind. Positions harden, every clause becomes a battleground, and agreement becomes impossible.
When everything is going well, no one knows whether they will one day be the buyer or the seller, the majority or the minority. That uncertainty is what produces balanced clauses: you draft fair rules because they could one day apply against you.
The clauses that really matter
Every agreement is built to measure, but certain clauses appear in almost all of them:
- buy-sell mechanisms between shareholders: a right of first refusal when a partner wants to sell, a piggy-back (tag-along) right so the minority shareholder benefits from the same terms, a drag-along right to allow the sale of the entire company to a third party and, sometimes, a shotgun clause to break a deadlock;
- life events: the death, disability, personal bankruptcy or divorce of a shareholder, with a planned buyout and its funding, often through life insurance taken out on each partner;
- share valuation: a method agreed upon in advance and updated periodically, so the price does not itself become the subject of the dispute;
- governance: the decisions that require unanimity or a supermajority, and a mechanism to resolve deadlocks;
- non-compete and non-solicitation covenants between shareholders, to protect the company from the one who leaves;
- dividend and employment policy: who works in the business, on what terms, and how profits are distributed.
Key takeaways
The buy-sell rules
No one should be able to sell their shares, or be forced to keep them, without rules known in advance.
First refusal, tag-along, drag-along: these mechanisms determine who can join the shareholder base, who can leave, and on what terms.
Life events
Death, disability, personal bankruptcy, divorce: the agreement provides for the buyout of the shares and, above all, how to fund it.
Criss-cross life insurance remains the simplest tool for giving the surviving partners the means to buy back the shares.
The agreed valuation
A valuation method set in advance and reviewed periodically keeps the price from becoming the heart of the conflict.
A value that is never updated is almost as dangerous as no value at all.
Three situations where it saves the day
A partner leaves. Without an agreement, nothing forces the departing partner to sell their shares, and nothing forces the others to buy them. You end up with an absentee shareholder who still votes and collects dividends without contributing.
A falling-out between equal partners. Two 50/50 partners who no longer see eye to eye paralyze the corporation: no decision gets through. The agreement provides for mediation, an independent valuation or an exit mechanism before the courts get involved.
An offer from a third party. A buyer shows up and wants the entire company. The drag-along right makes it possible to seize the opportunity; the tag-along right protects the minority shareholder. Without these clauses, a single person can sink the transaction.
When should it be drafted?
As soon as a second person acquires shares. Not at the first conflict, not at the first financing round: from day one.
The rule holds within families as much as between friends. Especially between friends, in fact: that is when you tell yourself you do not need one, and that is when conflicts do the most damage, because they take down the relationship along with the business.
Why consult a lawyer before drafting your shareholder agreement?
Templates found online give an illusion of protection: generic clauses, sometimes incompatible with your articles, rarely suited to your actual shareholder base. A useful agreement starts from your concrete situation: each partner’s role, the financial balance of power, the succession you have in mind.
At Meka Avocat, we draft and review shareholder agreements for entrepreneurs across every industry. We help you ask the right questions while they are still easy to answer.
Frequently asked questions
What is a shareholder agreement for?
To settle in advance what settles badly once conflict has set in: who decides what, how a shareholder comes in or goes out, at what price the shares are bought back, and what happens on death, disability, divorce or departure.
When should it be signed?
As soon as there is more than one shareholder, so at incorporation or when the second partner arrives. Signed while things are going well, it is negotiated in a few weeks. Signed once disagreement is there, it generally is not signed at all.
Which clauses really matter?
The buy-sell clause, the share valuation method, the events that trigger a buyback, the decision and deadlock rules, transfer restrictions, and the treatment of the life insurance that funds the buyback.
Is a shareholder agreement mandatory?
No, the law does not require one. But without it, the default rules of the statute and the articles apply, and they provide neither a buyback price, nor an orderly exit, nor any deadlock mechanism.
Do you and your partners have an up-to-date agreement?
Whether it is non-existent, incomplete or signed ten years ago, your agreement deserves a review before the next event that puts it to the test. A consultation takes stock and fills the gaps while everything is still going well.
An agreement is judged by its exit mechanisms: the shotgun clause, the non-compete clause, and the valuation method it adopts, the subject of what your business is really worth, and our shareholder agreements practice. Where a partner is going through immigration, the agreement must also preserve the program thresholds: see the agreement when a partner is an immigrant entrepreneur.
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Lawyer, member of the Barreau du Québec since 2014, founder of MEKA AVOCAT. This text sets out general legal information: it describes rules that apply broadly, not the answer to one particular case, and does not replace advice on your situation.
