Establishing the Relationship
Business relationships often begin with a common objective and an understanding of how the parties expect to work together. A written agreement gives legal effect to that understanding and addresses matters that may not receive much attention at the beginning.
For shareholders, the agreement operates alongside the corporation's articles, share structure, and other corporate records. It can govern aspects of the relationship among the shareholders and, depending on the agreement, how certain corporate decisions are made.
A partnership agreement serves a different legal relationship. In Ontario, a partnership may arise from the way parties carry on business together even without a formal written agreement. Where the partners have not agreed otherwise, Ontario partnership law may supply rules that do not necessarily reflect the arrangement they had in mind.
The objective is not to anticipate every possible disagreement. It is to establish the rules that matter to the business and its owners before those rules are tested.
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Ownership and Economic Rights
The economic arrangement among business owners should be clear.
Partners may contribute to the business in different ways and may not intend to share profits, losses, or other economic benefits equally. A partnership agreement can record the arrangement they have made rather than leave those matters to the default rules under Ontario partnership law.
In a corporation, the analysis is different. The economic and voting rights of shareholders are affected by the shares they hold and the rights attached to those shares. A shareholder agreement therefore has to be considered together with the corporation's existing share structure.
The agreement should reflect the economic arrangement the parties actually intend.
Management & Decision-Making
Owning a business and managing it are related, but they are not the same thing.
The owners may agree that some decisions can be made in the ordinary course of business while others require approval from some or all of them. This distinction can become particularly important where the owners have different roles in the business or where ownership is divided equally.
In a corporation, the agreement must also be considered in light of the role of the directors and the voting rights attached to the corporation's shares. In a partnership, the agreement can establish management arrangements that differ from the rules that would otherwise govern the partners' relationship.
The point is to make clear where authority lies before a disagreement arises about who was entitled to make a decision.
Changes in Ownership & Exit
Business relationships change. An owner may wish to sell, retire, pursue another opportunity, or transfer an interest. Death or incapacity may also require the remaining owners to address an ownership interest unexpectedly.
These events are considerably easier to manage when the parties have already agreed on a process.
Shareholder and partnership agreements can establish how an interest may be transferred, when the other owners have an opportunity to purchase it, and how an outgoing owner's interest will be valued. In the partnership context, Ontario law itself can produce significant consequences following the death or departure of a partner where the parties have not agreed otherwise.
Planning for an exit is therefore part of planning the relationship itself.
Deadlocks, Disputes & the End of the Relationship
Not every disagreement should end a business relationship. But some disagreements cannot be resolved through ordinary decision-making.
This is especially important in businesses where two owners hold equal interests and neither can make a significant decision without the other. A shareholder or partnership agreement can establish what is to happen when the agreed decision-making process no longer produces a result.
The agreement does not prevent disputes. It can determine what the parties are required or permitted to do when ordinary decision-making breaks down and, where necessary, provide a mechanism for an owner to leave or the relationship to end.
Our commercial litigation experience affects how we approach these provisions. Disputes among business owners often turn on matters that were left unclear when the relationship was established: ownership, authority, financial expectations, or what was supposed to happen when the parties could no longer continue together.
Where a dispute has already arisen, our Commercial Litigation practice advises and represents shareholders, partners, and businesses in ownership and business disputes.
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Speak With a Business Lawyer
If you are entering a business relationship with other owners or need to revise an existing ownership agreement, contact Englobe Law LLP to discuss the proposed arrangement.