In 2012, there were over 50,000 small businesses in the Thompson-Okanagan region. The strength of the entrepreneurial spirit in our region reflects a general trend throughout British Columbia – the Province with the highest per capita rate of small business ownership in Canada.
Entrepreneurs (and people who invest in their businesses by taking shares) are optimistic, willing to take risks to build their businesses and employ people within their community. Small businesses depend on having strong relationships with their community and with their business partners and investors. Unfortunately, the optimism and willingness to take risks leads some small business owners to forget about the need to properly document their relationship with their business partners.
Business owners are confident that their business plan will succeed – so why spend a lot of time (and money) drafting documents with lawyers that seem relevant only if things fail? Unfortunately, this line of thinking can lead to a great deal of unnecessary strife and expense – and often undermines relationships that could have been saved with proper documentation.
The fact is, every small business needs a shareholders agreement (plus other documents as the case may be) crafted with the specific needs of the business (and the businesses partners and investors) in mind. Shareholders agreements allow the parties to set out their reasonable expectations in advance – minimizing the risk of subsequent disputes which can arise simply because the parties did not fully understand how others were approaching the business opportunity.
Shareholders agreements will generally cover how the company has been financed and how it will be financed going forward – as well as the relative rights of the different shareholders (especially relevant if one shareholder is not going to be involved in the day to day management of the company). The agreements will address how the directors and officers will be chosen and the roles and responsibilities of the shareholders in both strategic and day to day issues. Although signing authority may seem a mundane matter, it can keep someone from signing a major agreement without first confirming the agreement with the other shareholders.
Shareholder agreements will often deal with share transfer and can help with succession planning, tax planning and future growth and expansion. These areas are especially important for family businesses, business with significant age differences between shareholders or businesses that are issuing shares to investors who may wish to recoup their investment on a shorter time frame.
The two most important components to a shareholders agreement define the major decisions that will require shareholder approval (and the percentage vote required to approve major decisions), confirm how disputes will be dealt with, and how to buy out a shareholder if a dispute cannot be resolved. As a lawyer who practices exclusively as a litigator with an emphasis on commercial and company litigation, I cannot stress enough how many disputes could have been avoided (or significantly simplified) if the parties had taken the time to craft a suitable shareholders agreement in the first instance. These disputes can weaken or destroy small businesses and are often in no one’s best interests – the lack of documentation creates so much uncertainty that it can be difficult to avoid anything other than harmful litigation.
Small business owners need to take the time with their trusted advisers to ensure that their company has the proper documentation in place to ensure a long and fruitful relationship with their partners and investors. A little money spent up front can save a lot of money (and even possibility their business) later on if a dispute arises.The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.