If you're incorporating a business with other people (such as co-founders, investors, or family members), one of the most important legal documents to consider is a Shareholders’ Agreement. While not legally required, this agreement sets the foundation for ownership, control, and long-term decision-making within the corporation. Without it, even routine issues like transferring shares, distributing profits, or resolving disputes can quickly become complicated and costly.
What Is a Shareholders’ Agreement?
A Shareholders’ Agreement is a private contract between two or more shareholders of a corporation. It defines their rights, obligations, and expectations with respect to the corporation and sets out how key decisions are made.
While Ontario’s Business Corporations Act (OBCA) provides general legal rules for companies, it doesn’t account for the specific dynamics of your business or your relationships. That’s where a Shareholders’ Agreement comes in: it customizes the rules for how you and your co-owners want to run your business, handle disputes, and protect your interests.
Why Solo Entrepreneurs Don’t Usually Need One
If you're the sole shareholder and director, there’s no one else to consult or share power with. You own 100% of the shares, make all the decisions, and don’t need to negotiate roles, voting rights, or profit distributions with anyone other than yourself.
But the moment you bring even one other decision-maker or owner into the corporation, the legal and practical dynamics change significantly. While “off-the-shelf” shareholders’ agreements are available (e.g., online), it is generally not recommended (and may do more harm than good) because every company is unique and the relationships and expectations between shareholders can vary widely. We go into more detail below on what’s at stake when there is more than one shareholder in the picture. But key takeaway is that you should always have a lawyer assist in preparing the shareholders’ agreement to make sure everything that your business partners care about are covered properly – it simply isn’t a one-size-fits-all situation.
What’s at Stake with Multiple Shareholders?
Without a Shareholders’ Agreement, key issues like control, liability, and succession can become uncertain or contested. Here are just some of the areas it helps clarify:
1. Share Ownership and Classes
- What class of shares does each person hold and/or are entitled to own: common, preferred, or special?
- Are shares voting or non-voting? Do some shareholders have more say than others?
- What liability protections apply to each class of shareholder?
- Can shares be sold or transferred? If so, under what conditions? For example, there may be restrictions on who the shares can be sold to and whether there are any pre-emptive rights that each shareholder should have against each other (such as rights of first refusal and shot-gun clauses)?
These issues affect everything from who controls the company to who can control the company to how risk is allocated if something goes wrong.
2. Decision-Making and Control
- What types of decisions require unanimous approval (e.g., selling the company)?
- Can one shareholder outvote the others?
- Who runs the day-to-day operations, and what limits are placed on that authority?
- How are directors appointed or removed?
Without a written agreement, Ontario law applies standard default rules, which may not reflect your intentions or protect your position.
3. Profits, Dividends, and Financial Outcomes
- Will profits be reinvested or paid out as dividends?
- Do working and non-working shareholders receive equal distributions?
- How are shares valued for tax or buyout purposes?
These questions become especially important as the business starts to generate income, and even more so if one party does more work than the others.
4. Exit Events, Bankruptcy, and Disputes
- What happens if a shareholder wants to leave, becomes insolvent, or passes away?
- Can other shareholders buy out their shares, and at what price?
- What happens if one shareholder files for personal bankruptcy?
- How are disputes resolved: mediation, arbitration, or court?
Each of these scenarios can have many different formulations because every company is unique and each shareholder’s intentions and expectations are different. Having a properly prepared and tailored shareholders’ agreement upfront avoids confusion and protects all parties down the line.
Common Clauses in Shareholders’ Agreements
While every agreement is customized to the business, typical clauses include:
- Voting thresholds for major decisions
- Buy-sell provisions (e.g., shotgun, tag-along, drag-along rights)
- Right of first refusal on share sales
- Non-compete and confidentiality clauses
- Deadlock resolution mechanisms
- Valuation formulas for shares
- Exit terms for founders and early investors
These tools help keep the business stable—even when shareholders don’t see eye to eye.
Final Thoughts
A Shareholders’ Agreement isn’t just a formality, it’s a practical tool for reducing legal risk, aligning expectations, and protecting the value of your business. It sets the rules for how the corporation is run, how decisions are made, and what happens when things go wrong.
If you’re building a business with others, taking the time to define those rules upfront isn’t just smart, it’s essential.
After you incorporate with SkyLaunch, SkyLaw’s legal experts are available to help you bring on other shareholders and put a proper Shareholders' Agreement in place.
