Shareholders’ agreements: errors and significant omissionsJean-Claude Desnoyers
A well written shareholders’ agreement can prevent conflicts within an enterprise, while meeting the different needs and goals of the shareholders. However, some clauses are sometimes omitted and may inadvertently have long-term impacts. The clause for determining the value used in a purchase of shares is an excellent example. It is a clause that protects shareholders and their assets, for example, when a death or a disability of one of them occurs.
If you plan to enter into a partnership or you’re a lawyer or notary, know that it is relevant to involve a Chartered Business Valuator (CBV) as you are preparing the shareholders’ agreement. He has the expertise to determine the fair market value (FMV) of the company and the clause that will be most suitable to assess the value of the shares. This way, all parties linked to the shareholders’ agreement will be protected.
What is a clause determining the purchase price of shares?
The clause for determining the value is used to facilitate the purchase of shares mechanisms when an unexpected situation occurs. Most often, it is related to the death or disability of a shareholder. The clause defines the calculation’s terms of the fair market value (FMV) in the shareholders’ agreement, if an imponderable event happens.
How is the price of the transaction determined? By who? On what date? Does an assessment need to be conducted on an annual basis or not? If a clause determining the value to be used in a purchase of shares was included in the shareholders’ agreement, many conflicts can be avoided. Since the FMV and profits are very critical issues for shareholders, it is important to prevent situations where determining the value may become a source of tension.
What situations can be avoided through a share buyout clause between shareholders?
A well drafted shareholders’ agreement can avoid conflicts, especially if a share buy-sell clause is included. For example, what happens if a shareholder leaves and wants to sell his shares? Or, how to handle the situation when a shareholder dies and the estate claims its share of profits? If a shareholder dies and the company receives $ 1 million in insurance proceeds, how will it be distributed? Or, if the deceased shareholder planned an amount of insurance to be paid to the company, should this amount be used to determine the value of the company and its shares? In this example, even the valuation date used can have an impact on asset allocation. If a redemption clause has not been well defined in the shareholder agreement, it may be difficult to determine the value of assets. We have seen in the past a number of conflicts in which the estate claimed a lump sum that was supposed to be paid returned to the shareholders. In the absence of such a clause, the conflict had to be settled in Court.
In such contexts, measures must be taken to minimize the impact and clarify the steps to follow to simplify the purchase of shares amongst shareholders. The company’s assets and the interests of all parties involved will be better protected. This is where a Chartered Business Valuator and his knowledge of shareholders’ agreements can help.
The role of a Chartered Business Valuator (CBV) in the shareholders’ agreement
With the expertise of a CBV, all clauses surrounding the fair market value of the company will be well-defined in the shareholders’ agreement. Those clauses will help prevent conflicts and offer ways to solve those that may occur. Especially since you can consult a CBV before and during the writing of the shareholders’ agreement. You can also use his services after the shareholders’ agreement is signed. Indeed, a clause determining the price of shares for the purchase of shares among shareholders can be added to a shareholders’ agreement at any time. But remember, managing complex situations is always easier when clauses and provisions have been provided before these situations occur.
Why involve a CBV in the drafting of the shareholders’ agreement?
A CBV can help protect all parties involved in a shareholders’ agreement. He collaborates regularly with lawyers, notaries, accountants and tax specialists to determine the fair market value of companies. With a CBV, these professionals can offer expertise and highly focused services relating to FMV.
Furthermore, the CBV may be involved in the terms or issues involving minority shareholders. He can make recommendations to the lawyer or notary to minimize the disadvantages of being a minority shareholder. He can help clarify certain aspects, such as the distribution of dividends.
A partnership with a CBV
You find that the wording of the share purchase clause is challenging? You would like to offer the expertise of a CBV to your clients? You have questions or are looking for a collaborator to write such a clause? Contact us. Together we will protect the interests of your clients, establish the share purchase mechanism, optimize the shareholders’ agreement and eliminate any share purchase related problems. This will prevent many unpleasant surprises and all parties will have peace of mind.