WHAT IS A UNANIMOUS SHAREHOLDER AGREEMENT?

A unanimous shareholder agreement is a legal contract among the shareholders of a corporation that restricts some or all the power and actions of the board of directors and transfers these powers to the shareholders. The Canada Business Corporations Act and the Ontario Business Corporations Act authorize the use of unanimous shareholder agreements to restrict the power of directors for federal or Ontario corporations, respectively. Under both acts, the shareholders of a unanimous shareholder agreement assume all rights, powers, duties, and liabilities of directors. If a non-shareholder purchases shares in a corporation and they were unaware of an existing unanimous shareholder agreement, upon becoming aware of the unanimous shareholder agreement or receiving the complete shareholder agreement, the new shareholder will have 30 days to rescind the transaction in a federal corporation[1] and 60 days to rescind the transaction in an Ontario corporation.[2] Below you will find common terms typically included in unanimous
shareholder agreements:

  • Procedures for making important decisions;
  • Procedures for transferring ownership or selling shares;
  • Identification of requirements for shareholders to provide financial contributions to the corporation, if any;
  • Pre-emptive rights which offer existing shareholders the right to have first option to purchase new shares issued by the corporation;
  • Implementation of restrictions on the transfer of shares to third parties;
  • Non-competition, non-solicitation, and confidentiality clauses, as applicable;
  • Identification of procedures for dispute resolution between shareholders;
  • Remedies for breach of the unanimous shareholder agreement;
  • Identification of exit strategies for shareholders wishing to leave the enterprise; and
  • Procedures for winding up the corporation.
  • Please note that there are many items included in a unanimous shareholder agreement that are not set out above.

WHEN TO USE A UNANIMOUS SHAREHOLDER AGREEMENT

Unanimous shareholder agreements are typically used by corporations with few shareholders, to prevent being forced off of the board of directors by majority shareholders. For example, if a corporation has three shareholders, each owning 33% of outstanding shares, then two directors could make an agreement to force out the third director. In these instances, a unanimous shareholder agreement would provide protection to the third director, who would not lose their voting power if they were voted out as a director. Other instances of when a unanimous shareholder agreement may be useful include when a corporation’s shareholders are unsatisfied with a director’s performance or actions and wish to restrict their power. Unanimous shareholder agreements may also prevent hostile takeovers by the inclusion of pre-emptive rights and rights of first refusal, which may prevent shareholders from selling their shares to non-shareholders without first offering the existing shareholders the opportunity to purchase the existing shareholder’s outstanding shares. While unanimous shareholder agreements are able to empower shareholders, they do come with their own disadvantages.

DISADVANTAGES OF UNANIMOUS SHAREHOLDER AGREEMENTS

One disadvantage of unanimous shareholder agreements is that shareholders take on liability that would ordinarily only be held by directors. For example, under a unanimous shareholder agreement, shareholders may become liable for paying employee salaries and wages, a responsibility typically held by directors. If you are a director or shareholder of a corporation, it is highly recommended to have an experienced business lawyer draft your unanimous shareholder agreement as early as possible after the formation of the corporation to ensure the agreement is properly drafted and its terms are enforceable against all shareholders.

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References:

1. Canada Business Corporations Act, s. 146(4).
2. Ontario Business Corporations Act, s. 108(9).

If you require legal advice or assistance regarding the review, negotiation, or drafting of a unanimous shareholder agreement, contact us today to book a consultation during which a business lawyer will answer any questions you may have about unanimous shareholder agreements.

Disclaimer:The information contained in this article is not to be construed as legal advice. The content is drafted and published only for the purpose of providing the public with general information regarding various real estate and business law topics. For legal advice, please contact us.

About the Author:

Shahriar Jahanshahi is the founder and principal lawyer at Jahanshahi Law Firm with a practice focus on representing business star-ups and investors in the province of Ontario. For further information about Shahriar Jahanshahi, click here.

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