Sara Boulet: Associate Lawyer at Stillman LLP
Shareholder disputes can be extremely expensive, not only because of the cost to litigate the dispute but also because of the disruption a shareholder dispute can cause to the operations of a corporation. As such it is always best to avoid shareholder dispute where possible.
With that in mind, here are 8 tips to try and avoid shareholder disputes:
1- Do not have any other shareholders
It may sound trite, but the simplest way to avoid shareholder disputes is to not have any other shareholders. If you want to have other people involved in your corporation you can offer them employment. If you are looking to raise capital for your corporation offer a debt to a potential investor instead of shares. Be sure to communicate to potential investors that you are offering them a debt only and not shares.
2- Meet other shareholder’s reasonable expectations
If you must have other shareholders in your corporation, be sure to meet their reasonable expectations. For example, it would be reasonable for a shareholder to expect you will run the corporation in a manner that will be profitable for all shareholders. If you make any promises or representations to someone who is becoming a shareholder in your corporation it would be reasonable for them to expect you to live up to them. Shareholders also have certain rights under Alberta’s Business Corporation Act, RSA 2000, c B-9 )“BCA”), so it is important to respect those rights. It is also important to ensure that you are communicating regularly with other shareholders.
3- Have a Unanimous Shareholders’ Agreement
Having a Unanimous Shareholder’s Agreement (“USA”) can help to clearly establish what shareholders can expect from one another as well as what rights and responsibilities shareholders have. USAs can also limit a shareholder’s ability to transfer shares to a new shareholder, preventing shareholders from transferring their shares to someone you would prefer not be part of your corporation. Additionally, a USA can include a dispute resolution clause, which sets out a process to be followed in the event of a dispute between shareholders. When drafting a USA be sure to communicate your understanding of the various clauses to the other shareholders.
4- Follow the USA
Again this will sound trite, but if you have entered into a USA then a simple way to avoid shareholder disputes is to follow the terms of the USA. If a dispute does arise and the USA contains a dispute resolution clause, follow the process set out in the USA as the Court is likely to require shareholders to abide by the terms of a USA and trying to resolve the dispute in another fashion may be a waste of time and money.
5- Include Exit Provisions in the USA
When drafting a USA, include some form of an Exit Provision. There are many different forms of exits provisions such as Shotgun Clauses, Right of First Refusal, Piggyback Clauses, etc. This type of provisions allow one or more shareholders to sell their shares and allow one or more shareholders to buy those shares. An Exit Provision can provide a very simple solution to a shareholder dispute, if one should arise that is serious enough that the parties can no longer work together.
6- Do not have an even number of Directors
Having an even number of Directors can cause a stalemate over decisions which require the approval of the majority of Directors and prevent necessary resolutions from being passed. This can cause friction amongst Directors and Shareholder, especially where the Directors are also the Shareholders, which can be avoiding by always ensuring you have an odd number of Directors. In the same vein, if you are only going to have 2 shareholders in a corporation, consider splitting the shares 51/49 to ensure that decisions which only require the consent of the majority of shareholders can be made.
7-Avoid Questionable transactions
If you are a Director or Officer of the corporation, try to avoid entering into any transactions which might make other shareholder suspicious. Entering into related party transactions or self-dealing may cause other shareholders to question your motives and cause friction amongst shareholders. If you cannot avoid entering into a related party transaction or self-dealing, be sure to be upfront with the other shareholders about your interest in the transaction.
8- Respect the requirements of the BCA
Corporations are required to do certain things by the BCA. For the example, section 132 of the BCA requires a corporation to have the first annual meeting of the shareholders no later than 18 months after incorporation and all subsequent annual meetings of the shareholders no later than 15 months after the holding of the last preceding annual meeting. Having the required annual meetings not only meets the statutory requirement but also gives shareholders the opportunity to discuss potential problems before they escalate to the point where they cause a shareholder dispute. Corporations are also required to provide shareholders with financial disclosure at every annual meeting, per section 155 of the BCA. Following the requirements of the BCA is a simple way to avoid causing friction between shareholders.
If you have any questions about implementing these tips, or about shareholder disputes, please contact your lawyer at Stillman LLP.