Founding Shareholder Agreement by jbl53548

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									           Shareholder Agreements
           Drafting Considerations


Prepared for:          Legal Education Society of Alberta
For Presentation In:   Edmonton, Alberta
                       December 4, 2007


                       Calgary, Alberta
                       December 11, 2007




For Presentation By:   David L. Sevalrud
                       Miller Thomson LLP
                       Calgary, Alberta
                                                Table of Contents

I.     INTRODUCTION ...................................................................................................1

II.    FACT SITUATIONS...............................................................................................2
       A.      Disparate shareholdings .................................................................................2
       B.      Diffuse control................................................................................................2
       C.      Family owned corporations ............................................................................2
       D.      Silent partners (desire to be anonymous) .......................................................3

III.   CONTEXT FOR FACT SITUATIONS ..................................................................3
       A.      Majority founding shareholder with minority employee shareholders for
               employee retention or succession purposes ...................................................3
       B.      Founding entrepreneur shareholder supported by non-employee minority
               investor shareholder or shareholders..............................................................5
       C.      Several employee shareholders with no shareholder having significantly
               more shares than other employee shareholders..............................................5
       D.      Several investor shareholders with no shareholder having significantly more
               shares than other investor shareholders and no employee shareholders ........6
       E.      Majority family founder shareholder with minority employee and non-
               employee children who are shareholders .......................................................6
       F.      Two or three sibling employee shareholders with relatively equal
               shareholdings..................................................................................................6
       G.      Operating shareholder with a minority investor shareholder from a
               strategically aligned business or with a desire to be an undisclosed
               shareholder .....................................................................................................7

IV.    COMMONLY CONSIDERED PROVISIONS FOR THE CIRCUMSTANCES
       DESCRIBED IN EACH FACT SITUATION.........................................................7
       A.      Majority founder shareholder with minority employee shareholders for
               employee retention or succession purposes ...................................................7
       B.      Founding entrepreneur shareholder supported by minority investor or
               investors .......................................................................................................13
       C.      Several employee shareholders with no shareholder having significantly
               more shares than other employee shareholders............................................17
       D.      Several investor shareholders with no shareholder having significantly more
               shares than other investor shareholders and no employee shareholders ......22
       E.      Majority family founder shareholder with minority employee and non-
               employee children who are shareholders .....................................................25
       F.      Two or three sibling employee shareholders with relatively equal
               shareholdings................................................................................................30
                                                    - ii -


     G.   Operating shareholder with a minority investor shareholder from a
          strategically aligned business or an investor who wishes to be an
          undisclosed shareholder ...............................................................................34

V.   LOOSE ENDS AND UNINTENDED CONSEQUENCES ..................................37
     A.   Parties to a shareholder agreement...............................................................37
     B.   Termination of the agreement ......................................................................38
     C.   Superseding old agreements.........................................................................39
     D.   Power of attorney .........................................................................................39
     E.   Acceleration of debt on default ....................................................................40
     F.   Security for the payment of the purchase price............................................40
     G.   Naming officers and directors ......................................................................41
     H.   Dispensing with auditor ...............................................................................41
     I.   Amending shareholder agreements ..............................................................42
                       Legal Education Society of Alberta
                               Shareholder Agreements
                               Drafting Considerations
                           Prepared by David L. Sevalrud
                               Miller Thomson LLP
I.       Introduction

A well drafted shareholder agreement should help provide some certainty for
shareholders in managing anticipated issues or events. Of course not all future issues or
events are easily anticipated. As time passes, what may have been an appropriate
shareholder agreement for a start up business is no longer applicable for the successful
mature business that exists several years later.1

I am sure that most of you have had a client ask for a standard shareholder agreement and
want an estimate of the cost before you start, if not a fixed fee quote. Often what is
delivered is a compromise of what you might like to have delivered. Rarely have I seen
or drafted a shareholder agreement that I did not think could have been improved in
hindsight. The pressures of time and cost will not go away. An investment must be
made at some point so that you have an effective way of gathering the most important
information needed to understand the kind of provisions that will most likely be useful in
your client's circumstances.

A good checklist or checklists for gathering facts and for discussing alternative
provisions is an essential starting point. Having good precedents that allow you to add
and remove provisions that are typical in shareholder agreements without having to spend
long hours making inconsistent precedents work together is also important.

Understanding why a particular shareholder structure has been created can help to focus
on matters that need to be discussed and on the recommendations you may make to assist
your clients develop the kind of agreement that will be relevant and practical for their
circumstances.

I have described seven example fact situations below that are representative of differently
structured and motivated private corporations. The facts situations are illustrative only.
They are intended to be representative of some of the structures that you may encounter
with your clients. I have added a brief summary of the facts and motivations that might
exist for each fact situation to give the subsequent comments more context. The
commentary is based on my own experience about what provisions tend to be useful or
relevant in the fact situations that are described. It is supplementary to other sources of



1
     The opinions and comments in this paper are those of the author and are not to be interpreted as
     opinions and comments of Miller Thomson LLP.
                                           -2-


information relating to checklists, descriptions of how various kinds of provisions work
and precedents that are found in textbooks and loose leaf services.

Typically the lawyer for the corporation will be the one who drafts a shareholder
agreement for consideration by the shareholders. Independent advice for the shareholders
is important for shareholder understanding. It will also assist in obtaining valuable
feedback about what is or is not appropriate for the shareholder agreement. Some
patience with that process will help create a better understanding of the new relationships
that are created by the agreement.

I would invite those who may be inclined to use these fact situations and the commentary
as a starting point for recording your own history of what has worked and not worked for
you.

The last part of this paper is a discussion of what I refer to as loose ends and unintended
consequences. These issues tend to affect most shareholder agreements in a more general
sense than the issues discussed in the context of the fact situations. As with the
comments relating to the fact situations, the comments relating to the loose ends should
be considered supplemental to other material and references.

II.    Fact Situations

       A.      Disparate shareholdings

               1.     Majority founding shareholder with minority employee
                      shareholders for employee retention or succession purposes

               2.     Founding entrepreneur shareholder supported by non-employee
                      minority investor shareholder or shareholders

       B.      Diffuse control

               1.     Several employee shareholders with no shareholder having
                      significantly more shares than other employee shareholders

               2.     Several investor shareholders with no shareholder having
                      significantly more shares than other investor shareholders and no
                      employee shareholders

       C.      Family owned corporations

               1.     Majority family founder shareholder with minority employee and
                      non-employee children who are shareholders

               2.     Two or three sibling employee shareholders with relatively equal
                      shareholdings

								
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