Shareholders' Agreement

Definition

A shareholders’ agreement is a private contract between the co-owners of a corporation that sets the ground rules: how decisions are made, how profits are distributed, and — most importantly — how shares can be sold or transferred. It’s distinct from the purchase and sale agreement, which is the contract governing the transaction itself.

In French-language Quebec documentation, you’ll see convention entre actionnaires used for the same concept.

In Quebec, shareholders’ agreements fall under civil law and can include clauses specific to that legal context. They aren’t mandatory, but the vast majority of businesses with more than one shareholder have one.

Why the shareholders’ agreement matters in a business sale

If you’re a co-owner of an SME and you’re thinking about selling your shares — or the whole business — the shareholders’ agreement is the first document to review. It almost always contains clauses that restrict or frame share sales. Ignoring them can void a transaction or trigger costly disputes.

The most common clauses affecting a sale are the right of first refusal (your partner can buy your shares at the same price as an outside buyer), the shotgun clause (a forced buyout mechanism between partners), the drag-along clause (which forces a minority shareholder to sell if the majority sells), and the tag-along clause (which lets a minority shareholder join the majority’s sale on the same terms).

In practice, a seller who overlooks their shareholders’ agreement risks losing months of negotiation. For example, if your agreement provides a 90-day right of first refusal in favour of your partner, you have to offer them your shares first — and wait for their answer — before selling to a third party. An experienced broker reviews your agreement at the start of the engagement to anticipate these constraints and plan accordingly.

What every seller should know

• Have your shareholders’ agreement reviewed by your lawyer and your broker before starting any sale process — restrictive clauses can add months to the timeline.
• Identify the share-transfer clauses precisely: right of first refusal, shotgun, drag-along, tag-along, and any restrictions on third-party sales.
• If your agreement is old or poorly drafted, consider updating it with your partner before launching the sale — it’s easier to negotiate when the relationship is good.
• Don’t confuse the shareholders’ agreement (which governs the relationship between partners) with the purchase and sale agreement (which governs the transaction with the buyer) — they’re two different documents with different roles.