6. I own more than 50% of the shares of a company with a partner. Do I still need a shareholder’s agreement?

A shareholder’s agreement is like a partnership agreement in a company. A shareholder’s agreement is very important to have even if you own more than 50% of the shares of the company. With more than 50% of the shares of the company, you can outvote the other shareholders in the company at the meeting of the shareholders and elect the directors who will run the company. The directors, in turn, can make decisions on the management of the company and declare dividends. However, this does not solve the problem of the disagreeable partner who will continue to remain in the company if you do not have the means to get him out. There are also minority shareholder’s rights that you have to observe. For example, if you want to sell your shares, you may need to have him paid off to sell your shares.

A shareholder’s agreement usually provides the mechanism for the purchase and sale of your shares in the event of your disagreement, sickness or death. The most popular clause in a shareholder’s agreement where there are two shareholders is what is commonly known as the “shot gun” arrangement. Under this type of a clause, you can require the other shareholder to buy your shares or you can buy out his shares. This is done by you or your partner initiating the process and offering to buy or sell the shares at a price per share designated by you. The other shareholder will then have the obligation to decide to buy or sell your shares. This ensures that the price you quote is reasonable.

The shareholder’s agreement also usually contains a clause on what you as a partner can do or cannot do. For example, if your partner has another business, there would be a clause to say that he cannot compete with the business that you two are doing together. The agreement will also set out the positions of each of the partners on the Board of Directors. The partner with the majority will usually have the position of the President.

It is important to provide for insurance on the lives of the key persons in the shareholder’s agreement. A small company very often survives on the ability of a key shareholder who has the know-how of the business. His life should be insured so that in the event of his death or disability, the insurance enables you to pay his estate off and you can find someone else to run the business.

A competent insurance agent should be involved in helping to deal with the insurance provisions of the agreement. The insurance contract can be made by the shareholders with the insurance company or by the company and it usually provides for the benefit to be paid to the owner of the policy when the need arises. When the budget is tight, and it is for most small companies, the insurance payments are often a low priority. It is easier to budget the payment for the insurance if the insurance is seen as a part of the family security of the shareholders.

A shareholder’s agreement can be complicated and it is important to give it a thought and the investment of the fees paid to the lawyer can save enormous grief and cost later. Giving voice to the shareholders’ relationship clarifies many of the issues which are prevented when parties know what to do if the disagreement arises. When partners first start a venture, there is a positive relationship. That is a good time when the agreement should be made and signed. You cannot wait for the dispute to arise and then expect the agreement to be made. The cost of resolving the dispute through the court can be extremely expensive.