Shareholder Agreements – Part Six

Shareholder Agreements: 6) Defaulting shareholders

A shareholder agreement can provide remedies in the event that a shareholder defaults in his or her obligations to the company, or if the circumstances of a shareholder change fundamentally.

For example, if a shareholder quits his or her job with the company, goes bankrupt, or becomes physically or mentally incapacitated, the following remedies could be triggered:

• the loss or suspension of the shareholder’s right to appoint directors;

• temporary or permanent loss of the shareholder’s ability to participate in making major decisions such as the ones described above;

• the right of the other shareholders to buy out this shareholder at fair market value or even a reduced price

In situations where a shareholder defaults in his or her obligations to provide financing to the company (when required to do so under the shareholders agreement), the other shareholders might be granted the right to:

• dilute the shareholder’s interest in the company;

• obtain additional shares at a reduced price;

• have their loans repaid on a priority basis; or

• be paid a high rate of interest on funds they provide to the company.

Located in: Corporate and Commercial Law