Every company has a set of articles that authorize its director(s) to borrow money and determine how meetings occur and where the company’s records office is located. The articles govern a company’s behaviour, stipulate the rights of its shareholders and determine the level of control of the directors. While the Government of BC has published a standard set of articles, most companies prefer to adopt more complex and business oriented articles.
If there is more than one shareholder, shareholders may choose to use a shareholders agreement to conduct the affairs of the company and individual shareholders including outlining major expenses requiring their joint approval or to determine exit strategies in the event that a partner wants to sell shares or becomes incapable of managing their responsibilities. This agreement protects shareholders’ interests, particularly if there are minority shareholders involved.
Some questions frequently addressed in a shareholders’ agreement include:
- What is the company’s purpose?
- How many directors are there and who chooses them?
- What is the quorum for directors’ meetings?
- What decisions require unanimous consent?
- Issuing new shares
- Should shareholders carry life insurance on each other to buy out spouses and pay taxes in the event of a death?
- What are the procedures if a shareholder wants to leave the company?
- Options include:
- Right of first refusal: other shareholders have first rights to match outside offers for shares.
- Drag along rights: a major shareholder can force a minor shareholder to sell to an outside buyer.
- Piggy-back rights: a minor shareholder must be included in any deal by a major shareholder
- Shotguns clause: a shareholder can force another shareholder to sell their shares or buy them out
- Default rights to sell shares on death
- Reduced share buy-back price if one shareholder goes bankrupt or becomes incapable