Monday, September 14, 2009

Unanimous Shareholders Agreements - Part 1 - Introduction

Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about a shareholder agreement or unanimous shareholder agreement, then you are encouraged to seek a professional.

For the purpose of this article, I'll be discussing unanimous shareholder agreements in the context of the Canada Business Corporations Act.

What is a Unanimous Shareholder Agreement?

A unanimous shareholder agreement is defined under the Act (s. 146) as a lawful written agreement among the shareholder of a corporation (some or all of them) that restricts, in whole or in part, the powers of the directors to manage or supervise the management of, the business and affairs of the corporation. So a shareholder agreement is basically an agreement that allows the shareholders to usurp and override the powers of the directors (e.g. the shareholders become the directors or they agree to each appoint 1 director on the board of directors, etc.).

Violation of the agreement on the part of a shareholder can lead to a breach of contract claim. If and when shareholders take over the power of the directors to manage the corporation, the Act gives them the same rights, power, duties, and liabilities as a director of the corporation. This is important because generally shareholders' liability is limited under the Act (in other words, unless a party can pierce the corporate veil, shareholder's personal liability and personal assets cannot be exposed to having to pay for damages of the corporation, its representatives, agents, employees, directors, etc.).

Unanimous shareholder agreements are important to have early on in the corporation's life because it details the rights and obligations of each shareholder, including management issues and share transfer provisions. It puts expectations on the table early on. Unanimous shareholder agreements are much harder to enter into between shareholders later on when progress (which carries with it political jealousies and potential infighting) has been made.

Finally worth mentioning is that the Act makes certain corporate requirements and powers subject t0 a unanimous shareholder agreement, including:

* Special majorities for director or shareholder votes (s. 6(3));

* The power to borrow and give security (s. 189);

* Issuance of shares (s. 25(1));

* Directors' ability to manage, or supervise the management of the business and affairs of the corporation (s. 102);

* The making, amending or repealing of by-laws (s. 103);

* The appointing of officers (s. 121);

* Directors and officers compliance with a unanimous shareholders agreement (s. 122(2)); and

* Directors and officers remuneration (s. 125).

A copy of the unanimous shareholder agreement must be kept at the corporate head office (along with the other documents in the minute book).

How much does a Shareholder Agreement cost?

Shareholder agreements vary in cost (e.g. from $2500 to $10,000), depending on the complexity of the provisions in the unanimous shareholder agreement. For example:

* What will be the business of the corporation? Will this be restricted?

* Who are the parties (e.g. voting and non-voting shareholders)?

* What mechanism will be used by the shareholders to elect or appoint board members?

* What mechanism will be used by the shareholders to vote their shares?

* What mechanisms will exist for shareholders to sell or transfer their shares (e.g. shotgun, put/call, consent sales, auctions, piggy back, drag a long, etc.)?

* What about compensation for shareholders who become working shareholders/directors?

* What about working shareholders who become inactive? How will their shares be treated upon inactive?

* What about confidentiality, non-solicitation, and proprietary information provisions? Are these needed?

* How will the agreement be terminated? Can dissolution result from a shareholder complaining about a breach of the agreement?

* General provisions such as notice, entire agreement, currency, assignment, severability, waiver, independent legal advice, etc. - Need an Ontario Lawyer? Make a Post (it's free and anonymous!). Get FREE Quotes!

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