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The Power of the Unanimous Shareholders Agreement
After five years and multiple drafts we just completed a Unanimous Shareholders Agreement (USA) for a long standing corporate client. Congratulations to them for persisting until they walked out of our office with a completed document. This USA will last for many years and likely govern their relations until they either sell or wind down the business. This client has ensured that the harvest of wealth they have spent many years creating will remain healthy and intact and provide for their family in the coming years.
Not every USA takes this long from start to finish. In fact, in most cases we can complete the entire process in two drafts. We meet with you and discuss the various options. We then prepare a document for your review. You might have some suggestions or concerns. We will then address those issues, make some further changes and present a final revised document for signature.
The beauty of the USA is that there is no prescribed formula for what it says. It can be tailored to fit your circumstances. Certainly, there are many common features and most clients find that they are comfortable with the standard choices that we present. At the same time, there is room for negotiation and customization to fit your particular requirements. What will happen if one shareholder dies or simply wants to get out of the business or if a takeover offer is obtained are typically items that are addressed in a USA. Without this document, a life-changing event can become a disaster. With this document in place, everyone has agreed in advance what will happen if one of these seminal events occurs.
In the standard USA, whenever a value must be determined for the business (such as the share purchase price if one shareholder dies) the default provisions state that the shareholders will make this determination on an annual basis for the upcoming year. In the absence of that, the value of the business must be determined by an independent third party, which is typically either a chartered accountant or a business valuation specialist. This can be an expensive process and, let’s face it, most small businesses never seem to find the time to do the annual get-together and valuation.
Our current client had their own unique method for determining value. After looking at several options they finally determined that the value is (EBITDA plus any consulting fees paid during the previous year to the shareholders) times four. EBITDA is a common term used in the accounting and finance field and translates as: Earnings before Income Taxes, Depreciation and Amortization. Now they have a fixed formula that has certainty and also adapts to the changes in the business from year-to-year.
The standard USA typically provides that if one shareholder dies the other shareholders will buy the shares of the deceased shareholder. Most shareholders find this agreeable as it means they will not be stuck with their deceased partner’s family members as the new shareholder. The family of the deceased shareholder typically appreciate the fact that they can compel the remaining shareholders to complete the share purchase and allow them the peace of mind of knowing they have an exit strategy out of the business.
In the current case, the business had a predictable cash flow that generated a decent rate of return. All three parties agreed that if one of them died their remaining family members should enjoy the benefit of that favorable rate of return. Simply cashing out their share would leave the family with cash in their hand. However, in today’s marketplace the rate of return on investments is rock-bottom. Everyone agreed that if the shares were transferred to immediate family members on death than those new shareholders could continue to enjoy this favorable business investment. However, since the family members are not skilled in the business, we redrafted the USA to state that their shares would be converted to nonvoting shares. If the shares are transferred to anyone other than immediate family members then buy out provisions kick in and the remaining shareholders must purchase the shares of the deceased and the estate must sell.
The flexibility and creativity shown by our clients illustrates the power and flexibility of the Unanimous Shareholders Agreement. All three partners and their immediate family now have a formula in place and the peace of mind of knowing what will happen in the event of the premature passing of one of the shareholders. The agreement also covers a number of other areas that provide certainty and direction to the corporation.
At Galbraith Law, we work with clients on a regular and ongoing basis to prepare Unanimous Shareholder Agreements to meet their particular circumstances and care for the harvest their business has generated. In the vast majority of cases the time from the initial phone call to the completion of the agreement is a matter of a few weeks. We also work with clients to provide customized solutions that, while they take longer to complete, make sure all the shareholders in the business have input into a document that meet their particular requirements.
For more information please click here to contact us. You can also find more helpful small business information in the small business section of our website when you click here. rns. We look forward to hearing from you and meeting with you to address your particular concerns.