Listen - Should Your Company Have A Shareholder Agreement

Business in the Okanagan continues to succeed despite the global pandemic. There are more and more buildings being constructed and tenants getting ready to move in. The business law team at FH&P Lawyers has been assisting clients for over 100 years in the Okanagan and is rooted in the community. The team provides legal services to people just starting out or that have been around for decades regardless if you are an individual with a small business or a large multi-jurisdictional corporation.

This FH&P Lawyers podcast entitled “Law Talk” will educate listeners on business matters including whether or not to incorporate, estate planning with a business and all other legal issues businesses face. You are welcome to ask our lawyers a question and they will answer it during an upcoming podcast. Email podcast@fhplawyers.com with your questions.

In this episode Partner Clay Williams and Associate Tanvir Gill discuss shareholders agreements and how the directors and shareholders work the day-to-day duties of a business.

Transcript:

Clay Williams: Welcome back to our third instalment of our business talk podcast, I'm Clay Williams and with me is Tanvir Gill, greetings Tanvir, and you have a good day?

Tanvir Gill: Yes I’m having a good day, but it’s busy.

Clay Williams: Isn’t it busy? As business lawyers, it is nuts right now.

Tanvir Gill: As we speak of incorporations I just got a call from a client purchasing a farm and we need to incorporate by tomorrow morning. So we need this done asap to get our agreements in place so it's definitely busy on the real estate front, on the business front, it's just insane right now.

Clay Williams: It’s an interesting time that’s for sure. So last time what we talked about was the actors in a corporation and we talked about the directors and the shareholders of a corporation and what their roles are and what they are expected to do. This time I thought we could drill down a little bit and just talk about how the directors actually do the management of the company and how they do that and how the shareholders are supposed to do that too. So I’ll just leap in and then you jump in after, I was going to say that the usual practice of a company to entrust the board of directors with the power to manage the company and that's free of any interference with the shareholders and that’s the usual practice. The shareholders are usually only left with the power to change the directors at the annual meeting or to remove them by special resolution. If the directors are tasked with the role of managing the company how do they do that? Well it’s a directors meeting and the articles that we've got here at FH&P Lawyers allow directors meetings to be called easily or quickly with very little notice and done informally, done by telephone or we can do it by a video conference, as long as the directors can all hear each other and interact and that's because in a smaller company the directors are going to be making these day to day decisions and they may be having directors meetings and not even really knowing about it and discussing about how the company's going to be run and that type of thing. In a more structured company, we may do notices and have directors' resolutions and things in writing and that’s usually when we have managers and company divisions and things like that.

Tanvir Gill: For some of our smaller company clients we have to think about the ones that have just one director and in that case don't picture a bunch of directors sitting together or on the phone making decisions, where you have one director that single director can have a meeting.

Clay Williams: That’s a good point. Sometimes when that person is making decisions, they are in effect having a meeting. So that’s directors, and now its shareholders. What we talked about with shareholders last time is that they generally aren't expected to take part in the management of the company, but it comes with the benefits of not being liable for anything either other than their initial investment, or the amount that they paid for the shares. So how do shareholders get to do the limited things that they can do? I guess we should talk about that, shareholders don't have a huge role but they have one role once a year and that’s the annual general meeting.

Tanvir Gill: The Business Corporations Act provides that a company has to hold its first annual general meeting not more than 18 months after the day on which the company was recognized. After that, you need to hold the meetings at least once in each calendar year but this can't be more than 15 months after the first annual reference date.

Clay Williams: So what happens at an Annual General Meeting? Frankly there usually isn’t an annual general meeting, most of the companies that Tanvir and I deal with, an AGM is waved and that can be done by unanimous shareholders resolution. That brings up an interesting point because sometimes, and I don't know about you Tanvir, but I'll have people come in here and say I want to incorporate and I want to include my brother and my aunt and all these people as shareholders, and I really caution them against that, there is really no reason to nowadays because they need your signature every year in order to wave that annual general meeting. If you can’t get everybody’s signature then you actually have to have an annual general meeting and there the financial statements are presented to the shareholders and they must be passed and an auditor must be waved and generally the directors resign and new ones are elected. That's the big power of the shareholders they get to vote in who's going to be the director and that will determine the route or path that the company's going to take.

With respect to an annual general meeting if you've got to company with a number of shareholders and somebody doesn't sign or you decide to have annual general meeting anyway there will be a quorum as set out in the articles of the company.

Tanvir Gill: I think this is a topic that we can definitely can get more detailed with depending on who our client is, what the company looks like, what the structure is, but in general it's good to think about it in the sense that it's not always just directors sitting around meeting, it could be in that way but if not then we do those consent resolution to keep business moving to keep things happening and efficiently, have the doctors do that day-to-day management.

Clay Williams: That’s a good point with respect to the annual general meetings, sometimes shareholders do have to sign off on another shareholder's resolution. We don't necessarily have to do that at a meeting, we can do that by a resolution that's also done in writing as long as it's unanimous shareholders resolution holding a meeting. That’s often the way we do things in order to keep companies moving along. Other than that, a company does need to file an annual general report and FH&P Lawyers does act for many companies as the Registers and Records Office (R&R) and we prepare the annual report and the resolutions approving it and we send it out every year. Now did you want to talk about the Transparency Registry?

Tanvir Gill: Yes. In 2019 we had royal assent for the Business Corporations Amendment Act and basically what that brought into effect was a transparency register so now what we need to do with our clients is to keep record of significant individuals. People always ask, what is a significant individual? I know this was mass topic of discussion when we first realized that this is going to come out and how we were going to record this but you are considered a significant individual if you directly or indirectly own or indirectly control 25% or more of the issued shares of the company or shares that carry 25% or more of the voting rights of the company. I know this can sound confusing because I was definitely confused when it first came out and there were so many what-ifs. Another thing to keep in mind is you could also meet the criteria of being “significant” if you have the ability to exercise some type of control over other individuals. The definition is quite different and we can keep that transparency registry here with our corporate books and we will update each time. There's different rules about the transparency registry to who we can provide it to, and how we release it so it's definitely the newer registry that's in place. Plus there is also a more recent transparency registry for corporations that own land but again when we have those corporate clients we make note of both of those and keep those updated for clients.

Clay Williams: We have been sending to our clients a reminder to get us that information so that we can prepare those registers for the Landowner Transparency Act, file the report as well so that's something to keep in mind, is that for you as a listener if do have a company then you do have some obligations and I think those obligations are up now, aren’t they?

Tanvir Gill: The transparency registry for sure. If we are not the R&R and somebody else is, even if it's yourself you need to be recording every significant individual’s full name, their date of birth, their last known address whether they are a Canadian citizen or permanent residents, a list of each country where they could be citizens, it's quite a long list that you have to keep updated.

Clay Williams: You have further requirements if you have a company that owns land, so those are pressing things that need to happen right now if you haven't done it yet.

Tanvir Gill: There are also reporting rules when it comes to companies that own land. We as a firm are also sending notifications to our corporate clients that own property, somebody who has purchased in the last year, that this is coming up and they have to also register in the transparency report.

Clay Williams: Give us a call, we can help you. Sometimes it can be quite challenging when there is a company that is owned by a family trust and then we have to examine the trust and the obligations perhaps to look through the trust and get the beneficiaries and it can be quite onerous.

What we have talked about to date are the way that many companies are operated but there's another thing we need to talk about and that’s shareholders' agreements. They can modify the way companies are operated and that can set out the expectations of the shareholders, when do you think would be a good time to bring up a shareholders agreement with some people that are looking to incorporate a company?

Tanvir Gill: I think for me it depends on the type of client we have in front of us, how there are in that company, what's going on specifically and what their business is about. In general shareholder's agreements are great in the sense that it sets out the dynamics or possibly even changes the dynamics for shareholders of a company from what they would be doing under the law. The overall philosophy I think of a shareholders agreement is to create a different balance of rights and obligations for shareholders than what would have been without that shareholder's agreement. We have said in our previous podcast, there is certain things that the shareholders get to do and there's certain things that the directors get to do, but through the shareholder's agreement we can set out more of what the shareholders rights and obligations are, how do they deal with certain things like share transfers, how do they deal with a certain shareholder wanting to exit the company? It even gets down to asking our clients very specific details; what are you going to do if one of your shareholders passes away, what are you going to do at mental incapacity, what are you going to do if one of your shareholders is going through bankruptcy and sometimes you can't predict these things of how they will impact your business in the moment but it's good to take that step back and look at it in the future. What's going to happen if one of your shareholders is going through a divorce and possibly a spouse is making a claim over the company? There is all these things that we get our clients to sit down and think about to say are these things that we can cover off now and get some type of agreement on. Again it depends on what does our company look like, how many shareholders do we have, what's the relationship between the shareholders; I have some companies that it's just not required they don't want that, it's two brothers running a farm it's not something they care to have in place.

Clay Williams: A husband and wife business it’s not necessary, but if you’ve got three buddies that are going to decide to operate a business; now there's one that kind of cries out for shareholders agreement because of the potential for the two against one. So you are absolutely right, you want to read and find out what everybody's expectations are and a shareholders agreement is a great opportunity to find out what everybody expects about their involvement in the business. For example, you’ve got three buddies who decide to put together a business detailing cars, well you know what is the expectation for management from each of them so let's record that now so somebody doesn't say later, hey I only became involved with you because I thought I was going to be a manager or I thought I was going to be an employee and get those out right away. I think you touched on it but having those dispute mechanisms is really important and getting an agreement on evaluation as well. The last thing you want is to be fighting in court over the value of the company or how to get rid of a shareholder who's no longer happy or in line with the vision of the company.

Tanvir Gill: You get to say from the get-go do you want to look at fair market value on the shares at that point in time down the road or do you want something different if this comes up.

Clay Williams: Exactly, so we can agree on it, in advance or at least have a mechanism to get there, for instance, you might agree that the company accountant would be the value of those shares rather than going to a full business evaluation which can be very expensive especially to a company that's just starting up.

Tanvir Gill: We will have a discussion with our clients based on what is everybody's relative age, how important is a business to each person, in which way is a business important, what role do they want to take, what's their respective financial positions? Are they minority shareholders, are they majority shareholders, and what is the exact business of the company, what's it doing and what exactly do the individuals want to agree on between themselves now.

Clay Williams: I think one of the biggest things too is to control who you're doing business with. That's why we provide these options for the other shareholders to purchase the shareholder’s shares when that shareholder dies because the shareholders may not want it to go through the will or the estate and end up in fact doing business with somebody they don't like, there is usually provisions dealing with things like bankruptcies, again the last thing that they may want is having to deal with a stranger in this closely held company and then suddenly somebody else shows up. We think through what might happen down the road and provide a pre-agreed solution which is certainly a lot cheaper than having to deal with it later in the courts.

Tanvir Gill: Ideally we want to avoid having deadlocks between shareholders, that would be a fear of so many clients to say what if we all disagree, how do we figure it out well a shareholder’s agreement.

Clay Williams: Some corporations, for example a development corporation, there may be an expectation that the shareholders are going to put in further money and so you want to agree with that in advance as to whether or not there's going to be cash calls and maybe have some controls in those cash calls as well. These are the types of things we want to have an interview with the people that are wanting to incorporate just find out everybody roles and expectations and let's get that dealt with right away.

Tanvir Gill: I love that we are doing this podcast to give people information to see or bring things to mind that they may not have thought about before but this is such an aerial overview of how everything works and there's only so much we can say and get across in our podcast so if you guys have questions or if there's more specific things that you would like us to cover please don't hesitate to reach out to either Clay or I.