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Articles and Shareholder Agreement

Articles and Shareholder Agreement

Every company has a set of articles that give the director (or directors) authority to borrow money, determines how meetings happen, and where the companies records office are. The articles are basically the master rules that govern how a company must act, what rights are associated with which shares and what powers the directors have.  While there is a standard set of articles published by the government of BC, most companies prefer a more complex and business oriented articles.

Additionally, if there is more than one shareholder, shareholders may choose to use a shareholders agreement to outline major expenses requiring shareholder approval or exit strategies to describe what happens if one partner wants to sell their shares or became incapable.  This agreement allows shareholders to protect their interests, particularly if there are minority shareholders.

Some issues that are commonly addressed in a shareholders’ agreement:

  • What is the company’s purpose?
  • How many directors are there and who chooses them?
  • What is the quorum for director’s meetings?
  • What decisions require unanimous consent?
    • Hiring
    • Expenses over $__________ .
    • Issuing new shares
    • Borrowing
  • Are any shareholders also key employees?
  • Should shareholders all have to loan money equally if needed by the coompany?
  • Should the shareholder’s take out life insurance on each other to buyout spouses and pay taxes if one dies?
  • What happens if a shareholder wants out:
    • Right of first refusal – other shareholders have first rights to match outside offers for shares.
    • Drag along rights – a major shareholders can force a minor shareholder to sell to an outside buyer.
    • Piggy back rights – a minor shareholder must be included in any deal by a major shareholder
    • Shotguns clause – a shareholder can force another shareholder to either sell their shares or buy them out.
    • Default rights to sell shares on death.
    • Reduced share buy back price if one shareholder goes bankrupt or incapable.
  • Non-competition agreement by shareholders to not compete while they remain shareholders and for a certain period after death.