By Graydon Ebert, Associate
As its name suggests, a shareholders’ agreement is an agreement, among some or all of the shareholders of a corporation. But what is its purpose?
The Business Corporations Act allows for two or more shareholders to make an agreement in writing providing that when the shareholders exercise their voting rights with respect to their shares, they shall be voted as provided in the agreement. One example of a use of such an agreement may be that two or more minority shareholders of the corporation may agree to vote together on the appointment of directors of the corporation so their collective voting power may be stronger than their individual voting power.
More commonly, especially in private corporations with multiple shareholders, you will see all of the shareholders of a corporation agree, in writing, to a unanimous shareholder agreement. The Business Corporations Act provides that a written agreement among all the shareholders of a corporation may restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of the corporation.
The default for a corporation is that it is managed entirely by the directors (who are elected by the shareholders) and by the officers who are appointed and supervised by the directors. Essentially, a unanimous shareholder agreement allows the shareholders of a corporation to change that default and it gives the shareholders the power to manage or supervise the management of the corporation to the extent that the agreement allows. The agreement may allow for shareholder consent for changes to the constating documents of the corporation, any issuance or allotment of shares, any purchase or sale of real property, or any number of decisions typically made by the directors of a corporation.
In addition to restricting the power of the corporation’s directors, or setting out how shares may be voted, a unanimous shareholders agreement will often address several other important issues, like:
- How shareholder loans may be paid out;
- How shares may be dealt with upon the death, insolvency or marital breakdown of a shareholder;
- Provisions dealing with the purchase/sale of shares by a shareholder, i.e. rights of first refusal, forced buy/sale, requirements for a sale to a non-shareholder, etc.;
- Dispute resolution mechanism for dealing with shareholder disputes; and
- Provisions limiting a shareholder’s right to compete with the corporation or solicit clients or employees from the corporation.
Some other important things of note about unanimous shareholder agreements:
- A transferee of shares subject to a unanimous shareholder agreement shall be deemed to be a party to the agreement as if he/she signed it (although a purchaser, who is not a current shareholder, for value without notice of the agreement may rescind the purchase within 60 days after the purchaser actually receives a complete copy of the agreement);
- A shareholder who is party to a unanimous shareholder agreement has all the rights, powers, duties and liabilities of a director of the corporation to the extent that the agreement restricts the discretion or powers of the directors to manage or supervise the management of the business of the corporation and the directors are relieved of their duties and liabilities;
So, when should the shareholders of a corporation enter into a unanimous shareholder agreement? Unless the corporation is operated by and the shares are owned by only one person, a unanimous shareholder agreement in some form is usually a good idea. It is especially important in small private corporations owned by a small number of shareholders, or where a corporation previously owned by one person is taking on investors. The success of small private corporations is usually dependent on the people who control these businesses. Unplanned events can lead to changes in share ownership of a corporation that can negatively impact this success. A shareholders’ agreement, which has restrictions on how and to whom shares can be transferred can be the best way to plan for the future of the corporation while protecting shareholders from unfavourable business transition or operational possibilities.
If you need advice on whether a shareholders’ agreement might be a good idea for your business, our business law professionals would be happy to discuss your options with you.