Shareholders’ Agreement 101
Do I need a Shareholders’ Agreement with my Spouse?
Oh to be blessed with a crystal ball that would allow people to see into the future.
We love the optimism of spouses, especially spouses who are also business partners. While it would be amazing to be able to say that a shareholders’ agreement is not necessary when you are in business with your spouse, it becomes even more important when your business partner is your life partner, or if you make your life partner a business participant.
First Things First: What Is a Shareholders’ Agreement?
A shareholders’ agreement is a written document between shareholders of a company that outlines each person’s rights and obligations and defines how the business should be run.
It can include many important aspects related to what happens to a shareholder’s shares if they pass away, compulsory buy-out provisions, dispute resolution, how decisions are to be made, and more.
Why Make My Spouse a Shareholder
There can be many very good reasons to make your spouse a shareholder of your company, even if your spouse is not involved in your business. However, you should consider the pros and cons of doing so, before taking that step. Proper legal and accounting advice is crucial, to be sure you fully understand what you giveth and what you taketh away.
Not All Spouses are Equal
People often think that your “spouse” means your life partner, regardless of whether you have formalized your union through marriage. In the eyes of the law, however, married spouses and common law spouses are not necessarily treated the same. This is especially true on death if there is no will. Common law spouses are not beneficiaries of an estate if there is no will. In other words, your common law spouse does not automatically inherit your shares if you do not have a will. Similarly, your legally married spouse may not automatically inherit any or all your shares if you do not have a will.
Rights and Obligations
A shareholders’ agreement can help to identify what happens to certain shares on the death of one shareholder, or even on separation/divorce. Will your spouse be required to be in business with your estate? This can be especially problematic if your spouse is not the beneficiary of your estate (for example if there are children from a prior relationship and there is no will) or your spouse is not the beneficiary of 100% of your estate. Will your soon-to-be former spouse be able to hold up the day-to-day operations of the company, given their rights as shareholder, or demand a large pay out on the break down of the relationship?
A shareholders’ agreement can outline each party’s rights and obligations. It can set out how to establish a price for the shares, how it can be paid (for example will it be paid all at once or can it be paid out over time), who gets to make the decision and how much time they have before the other party gets to make a decision.
Breakdown or Breakup?
Do not let the breakdown of your relationship (by death or divorce) break up the legacy you have created through your company. While it is good to follow your heart, be sure that you are also being pragmatic. While nobody likes to think about the “what ifs” of the relationship not working out, it is much easier to make those decisions from a position of calm, peace and hopefully love, rather than during a crisis.
All relationships come to an end. Sometimes that end is divorce/breakup, sometimes it is death. Plan for the end. In an ideal world, the money spent on a shareholders’ agreement is wasted because love has prevailed. However, the money spent on a shareholders’ agreement will be money well spent if it can help avoid a protracted dispute over your company as part of the dissolution of your relationship.
Contact Frederikse Law Now
We would be more than happy to assist you in creating a shareholders’ agreement that is beneficial for your business and that puts you at ease. If you want to learn more about this type of agreement or have any specific question, do not hesitate to contact us. Our team is here to provide the legal assistance that you need.