Should our shareholder agreement say anything about dividends?

Including a dividend policy in a shareholder agreement is optional but can prevent significant disputes down the road. By default under the Ontario Business Corporations Act, dividends are declared at the discretion of the directors. In a closely held corporation, the directors are often also the majority shareholders — which means they can choose to pay themselves through salaries or bonuses and never declare dividends, effectively cutting out passive minority shareholders from any return on their investment.

A dividend policy provision in a shareholder agreement might require that a minimum percentage of after-tax profits be distributed annually, or it might specify conditions under which dividends must be considered. Alternatively, it may simply require that any shareholder taking compensation as a director or officer in excess of a set threshold must obtain approval from all shareholders.

Whether a mandatory dividend policy makes sense depends on the nature of the business and the shareholders' goals. Growth-focused companies often reinvest all profits, while mature, stable businesses may have cash to distribute. Whatever the intended approach, making it explicit in the agreement avoids assumptions on all sides and gives minority shareholders meaningful protection against being frozen out of the company's financial returns.