Shareholder agreements: 5 key practices

When it comes to shareholder agreements, the "shotgun" clause is definitely the one that gets the most media coverage. It's very useful, but it's not the only thing you need to consider.

Jean-Pierre Bonin, notary/tax specialist at Bonin & Lefebvre, recommends 5 good practices when defining your business relationships. 

1. Don't wait for a conflict to arise before creating a shareholder agreement

"It's kind of like a marriage contract; you write up a shareholder agreement when things are going well," says Bonin.

Sign an agreement right from the start. By deciding ahead of time what you would do in various situations, you'll keep conflicts from dragging on--conflicts that can jeopardize everything you've built together.

2. Establish the basis of your agreement

Here are some questions you'll need to answer. 

  • Shareholders and employees
    • What do you expect from each of the shareholders? (e.g., role, objectives)
    • How many hours a week will you work and how much vacation will you take?
    • Will your spouse be involved in the business and under what salary conditions
  • Suppliers
    • Will you keep a supplier with whom you have a good relationship, even if they often deliver late?
  • Sales
    • Where do you want to be in 1, 2 or 5 years? 
    • What strategies will you use to get there?

3. Choose arbitration over courts

By including this kind of clause in your agreement, you accept that the arbitrator's decision will be final and not subject to appeal. "It's a way to reduce the cost and expense of a dispute that can drag on for years and jeopardize the survival of the company," says Bonin.

4. Determine capital contribution rules immediately

This question will often come up over the course of the company's development. Here are a couple of things to consider.

  • Who will inject funds?
  • What proportion will each shareholder contribute? Will you provide money equally or based on the wealth of each one? 

5. Think about non-compete and confidentiality clauses

If the success of your business is based on a special, innovative formula or on a new technology you've spent years developing, then you should seriously consider protecting it with these provisions.

  • A non-compete clause, for a period of time, prevents an associate who withdraws from the business from starting a company or getting involved in operating another business with a similar idea, and from working for a competitor in the same industry.
  • A confidentiality clause requires non-disclosure and also protects strategic information shared for work purposes. 

Other points to address right from the start

Whether two or more of you are starting a business together, you'll have to decide what will happen to your shares or those of your shareholders in the event of death, voluntary withdrawal due to a disagreement (so-called "shotgun" clause) or the sale of the business to a third party.

To find out more, see our tipsheet on shareholder agreements - This link will open in a new window..