In business, breaking up can be hard to do

I often receive calls from people who have invested money in a private corporation and want their money back, or want to part ways with their business partner(s).

I often receive calls from people who have invested money in a private corporation and want their money back, or want to part ways with their business partner(s).

In most cases, the parties involved are the owners of a private corporation, and do not have a shareholders’ agreement in place or did not structure their affairs thinking about the situation they now find themselves in.

As a result, the only way to get what they want is via agreement with the other shareholder(s) or court action to access the remedies in the Business Corporations Act. Depending on the circumstances, agreement may be unlikely, and lawsuits are generally expensive and take a long time, and there may not be grounds to get what the person wants from the court. In these cases, the parties would have been well served to seek legal advice before becoming a shareholder.

For instance, a person who desires to become a shareholder of a corporation and who will be investing money may want to advance the money as a loan (and hence also be a creditor of the corporation) and pay only a nominal amount for the shares.

The loan should be evidenced by a loan agreement, or a promissory note from the corporation, which will set out, at minimum, the amount of the loan, the interest rate and the repayment terms. The loan could even be guaranteed by the other shareholder(s).

The investing shareholder could also take a security interest in the assets of the corporation or other shareholder(s) as collateral. With these documents in place the investing shareholder (and other shareholder(s) will know what to expect regarding the loan, and the investing shareholder will be in a much better position to get money back then if he or she is only a shareholder and not also a creditor.

Further, shareholders in a private corporation should almost always enter into a unanimous shareholders agreement (a “USA”), which is an agreement between shareholders governing a number of matters including death, valuation, financing, control and transfer of shares. Importantly, a USA will usually have a mechanism to end the relationship should shareholders want to part ways. One such mechanism is a “shotgun clause”, which essentially allows one shareholder to offer to sell his or her shares to the other shareholder, and if the other shareholder does not agree to buy them, then the other shareholder is bound to sell his or her shares to the offering shareholder at the same price per share.

The very presence of a shotgun clause can be very helpful for shareholders wishing to part ways, and can be triggered and enforced if the shareholders cannot otherwise agree. Shareholders with a USA in place are in a much better position if a dispute arises.

If you are becoming a shareholder in a private corporation you are well advised to seek legal advice before doing so. Proper structuring and appropriate agreements will not only provide peace of mind and help ensure you and the other shareholder(s) have the same expectations, but could save you a lot of grief, time and money down the road.

Legally Speaking appears every second week in LIFE. It is intended for information purposes only. Readers with a specific legal problem should consult a lawyer. This week’s column was written by James Cawsey, of the Red Deer law firm Duhamel Manning Feehan Warrender Glass. Cawsey can be reached at 343-0812 or at www.reddeeraltalaw.com.

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