A shareholder agreement is an important document that can save you time and money when problems arise later or when unforeseen circumstances (such as death of a shareholder) arise later. 

A shareholder agreement is the foundation and building blocks of a corporation as it will create a framework between the various shareholders of the company to deal with various issues that can arise during the life of the corporation. It is a very valuable tool that will help you deal with the following (non exhaustive list):

1. How to address various stages of growth;
2. How to address various challenges during the entrepreneurial journey;
3. How to raise capital;
4. When one shareholder is financing the company and the other has failed to do so;
5. How to resolve disputes between shareholders;
6. How to deal with a death of a shareholder; and
7. How to deal with a shareholder who wants to exit the company. 

The purchase or sale of a business can be structured in two very different and distinct ways. Transactions are typically structured either as asset purchase transaction or as a share purchase transaction. 

Both forms of transactions have their own unique advantages and disadvantages and must be carefully considered before making a decision as to what option would be best for your particular circumstances.

If you have a shareholder agreement the agreement will typically include provisions for resolving disputes and will often include provisions and a framework that will allow you to purchase the shares of the other party also commonly known as a shot gun clause. 

If you don’t have a shareholder agreement, then you will have to rely on the provisions of the applicable act that your corporation was registered under. For Ontario corporations that would be governed by the Ontario Business Corporations Act.

The type of due diligence required will depend on whether the transaction is structured as an asset purchase transaction or a share purchase transaction. 

In an asset purchase transaction, a lawyer will inquire about the various contracts that will be assigned on closing namely the lease agreement, will contact regulatory authorities, municipalities and other licensing authorities that have jurisdiction over the operations of the business. In certain situations, a title search will also be completed to ensure no unknown liabilities are being transferred to the purchaser even if the commercial premises is being leased because once the lease is assigned any defaults caused by the former owner become the purchaser’s problem. 

In a share purchase transaction, a lawyer will be required to complete its diligence very thoroughly as all the liabilities will also be assumed therefore it is critical to investigate every facet of the business to ensure the liabilities that are being assumed align with the expectations of the purchaser. 

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