Rights Defined: Shareholder agreements will protect your interests
Posted: March 5, 2018 by Jaclyne Reive
Are you one of two or more shareholders in a trucking company? Have you thought about your rights if your partner decides to sell shares to someone you don’t want to do business with, or if your partner becomes ill and can no longer help manage the business? What about if your partners receive a great offer for their shares and you would like to participate, or other shareholders want to make a crucial business decision without you?
A shareholder agreement can provide the answer to these questions and more. It sets out each shareholder’s rights, privileges, and obligations connected with the business, and is a cost-effective way of deciding how certain issues will be dealt with — avoiding costly litigation in the future.
Generally, business decisions that require shareholder consent can be made with the approval of the majority of shareholders, except in limited cases. Where one or more shareholders hold the majority of voting rights, minority shareholders can be left with little to no decision-making power. This situation can be avoided by using a shareholder agreement to provide equalization among shareholders, listing key business decisions that will require unanimous approval. Taking out a bank loan to purchase a substantial addition to the fleet, or changing an executive employee’s salary are examples of that.
Funding the business
A shareholder agreement can set out how the trucking company might access funds, by establishing when the shareholders should provide additional capital, the amount that each shareholder must contribute, and repayment methods if the funds will be advanced as loans.
What if you decide that you no longer want to do business with your current partners, or if one partner wants to sell part of their shares to a friend that you don’t know particularly well? A shareholder agreement can set out when a shareholder may transfer shares. For example, it could say:
right of first refusal: a selling shareholder must first offer to sell their shares to the other shareholders. If they are not interested, then the shareholder may offer the shares for sale to a third party.
drag along right: if a majority shareholder wishes to sell all of their shares to a third party, the minority shareholder could be forced to sell all of their shares as well
tag along right: where a majority shareholder has received an offer for their shares, a minority shareholder may also sell their shares to the same purchaser.
Insolvency, illness, death, or incapacitation
If a shareholder dies, becomes severely ill, disabled, insolvent, or is unable or unwilling to contribute to the business due to some other cause, this can leave a fleet’s future uncertain. A shareholder agreement can set out whether the shares are to be bought by the corporation or the remaining shareholders, or be transferred to another beneficiary — perhaps named in the shareholder’s will.
Maybe you have had the not-so-wonderful experience of having to deal with a lawsuit. If you prefer to avoid the courtroom, you can ensure that the shareholder agreement provides for alternative ways of resolving disputes, such as mediation or arbitration.
While this can’t stop the company from having to deal with cargo claims or unpaid freight charges in court, it at least provides one way of avoiding the courtroom.
The sooner that shareholders think about these issues and put an agreement in place, the more likely they will avoid headaches, costs, and possible litigation. The agreement provides clarity and certainty to the relationship between business owners.
Jaclyne Reive of Fernandes Hearn LLP can be reached at 416-203-9819, and followed on Twitter through @jacklyne_reive, or her blog at https://jaclynereive.wordpress.com. This column is intended for information purposes only and does not constitute legal advice.