Shareholders’ Agreement – Fundamental Matters
In a previous blog post, we provided a brief overview of the benefit of having a shareholders’ agreement, and examples of matters that can be addressed by a shareholders’ agreement.
Without a shareholders’ agreement, the governing law of the company will dictate whether a decision is made by directors or by shareholders and the threshold of approval required. Most day-to-day operational matters need approval by directors by simple majority. The shareholders of a company may decide that a “majority rules” methodology is not appropriate, or that shareholders should be consulted, for certain significant decisions that may need to be made, and this is where a shareholders’ agreement can be useful.
A shareholders’ agreement can stipulate what matters require additional approvals before the company can proceed (commonly referred to as “Fundamental Matters”). The following is a list of items typically carved out of simple majority rules decisions:
- Declaring a dividend
- Issuing shares
- Approving annual budget
- Making loans
- Borrowing money
- Changing the articles or by-laws*
- Related party agreements
- Sale of all or substantially all of the assets*
- Material changes to the business of the corporation
*denotes matters that require shareholder approval at law
The shareholders’ agreement can provide that the listed Fundamental Matters require a super majority approval of shareholders (ie. 75% of outstanding votes), or require that a majority includes a certain shareholder, or a certain number of shareholders (ie. a majority of the outstanding votes provided that at least two shareholders are part of the majority). This ensures that more principals are involved in the major decisions of the company and its business.
Determining what constitutes a Fundamental Matter, and what approvals are required will vary depending on each company’s business and capital structure.
Thinking of putting a shareholders’ agreement in place for your company? Contact us.