Shareholder Agreements in Canada: What They Are and Why They Matter

A shareholder agreement in Canada is a private written contract among some or all of a corporation's shareholders that sets out how the company will be owned and run, and what happens when an owner wants to leave, dies, becomes disabled or falls out with the others. It sits alongside the corporation's articles and by-laws. Canadian corporate statutes recognize two kinds: an ordinary shareholder agreement, which is simply a contract among the shareholders who sign it, and a unanimous shareholder agreement, which is signed by all the shareholders and can legally take powers away from the board of directors (section 146 of the Canada Business Corporations Act (CBCA) and section 108 of Ontario's Business Corporations Act (OBCA)).

What a shareholder agreement is

A shareholder agreement is a contract among the owners of a corporation. It sets out how they will run the company together and, just as importantly, what happens when things change: someone wants out, someone dies, the owners disagree, or a buyer comes knocking. It sits alongside the corporation's articles, but it is a separate, private contract between the shareholders. It is not filed with Corporations Canada or the Ontario Business Registry, and it does not appear on the public record.

When a corporation has more than one shareholder, this is the document that quietly prevents most of the disputes that tear small companies apart. It is easy to skip when everyone is getting along at the start, which is exactly why so many businesses regret not having one. The corporate statute supplies only a general framework: the shareholders elect the directors, the directors manage the business, and certain fundamental changes need a special resolution. A shareholder agreement fills in the specific, practical rules that the owners have agreed between themselves.

Ordinary vs unanimous shareholder agreements

Under both the CBCA and the OBCA, the directors manage, or supervise the management of, the business and affairs of the corporation, subject to any unanimous shareholder agreement (CBCA s. 102(1); OBCA s. 115(1)). That phrase, subject to any unanimous shareholder agreement, is what separates the two kinds of agreement.

An ordinary shareholder agreement can be signed by only some of the shareholders. A common example is a voting or pooling agreement, under which two or more shareholders agree in writing to vote their shares in a particular way, for instance to elect each other as directors. Both statutes expressly allow this (CBCA s. 145.1; OBCA s. 108(1)). An ordinary agreement binds the people who sign it as a matter of contract, but it does not change the legal powers of the board.

A unanimous shareholder agreement (often shortened to USA) is a written agreement among all the shareholders, or among all the shareholders and one or more people who are not shareholders, 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 (CBCA s. 146(1); OBCA s. 108(2)). Most shareholder agreements for small private corporations with several owners are drafted as unanimous agreements, because that is the form that allows the owners to reserve important decisions for themselves.

How a unanimous shareholder agreement works

Because a unanimous shareholder agreement can take decisions away from the board, the statutes attach specific consequences to it. The most important is the shift of responsibility. Under CBCA s. 146(5), to the extent a USA restricts the directors' powers, the parties who are given that power have all the rights, powers, duties and liabilities of a director, including any defences available to directors, and the directors are relieved of their rights, powers, duties and liabilities, including their liabilities under section 119 (such as unpaid employee wages), to the same extent. OBCA s. 108(5) is to the same effect for a shareholder who is a party to the agreement, and expressly refers to the liabilities under section 131. In other words, shareholders who take control of a decision also take on the legal exposure that comes with it.

This is reflected in the general rule on shareholder liability. Section 45(1) of the CBCA says shareholders are not, as shareholders, liable for the corporation's liabilities, but lists section 146(5) among the exceptions. Owners who use a USA to manage the business directly are therefore stepping into the directors' shoes for those matters.

• Sole shareholder declaration. When one person holds all the issued shares, a written declaration by that person restricting the directors' powers is deemed to be a unanimous shareholder agreement (CBCA s. 146(2); OBCA s. 108(3)).
• New owners are bound. A purchaser or transferee of shares subject to a USA is deemed to be a party to it (CBCA s. 146(3); OBCA s. 108(4)), and under the OBCA so is a person to whom new shares are issued while a USA is in effect (OBCA s. 108(7)).
• Notice on the share certificate. Under CBCA s. 49(8), a unanimous shareholder agreement or a restriction on transfer is not effective against a transferee who has no actual knowledge of it unless it, or a reference to it, is noted conspicuously on the share certificate.
• Right to rescind. A federal purchaser who was not given notice may rescind the purchase within 30 days after becoming aware of the agreement (CBCA s. 146(4)). Under the OBCA, a purchaser for value without notice generally has 60 days after actually receiving a complete copy of the agreement (OBCA s. 108(7), (9) and (10)).
• Arbitration and amendments. The OBCA expressly allows a USA to set its own amendment procedure and to refer disagreements among the parties to arbitration (OBCA s. 108(6)).
• Professional corporations. In Ontario, a unanimous shareholder agreement for a professional corporation is void unless each shareholder is a member of the profession, subject to regulations for certain health profession corporations (OBCA s. 3.2(5) and (6)).

What it covers: common clauses

A good agreement answers the questions people do not want to think about on day one. No two agreements are identical, but most agreements for owner-managed Canadian corporations draw on the same set of building blocks.

How it relates to the articles and by-laws

A corporation's constating documents come in layers. The articles of incorporation are filed with the government and set out the name, the share classes and their rights, the number of directors and any restrictions on transferring shares (CBCA s. 6(1)). The by-laws are internal rules about meetings, officers, banking and signing authority. Under CBCA s. 103, the directors make, amend or repeal by-laws unless the articles, the by-laws or a unanimous shareholder agreement otherwise provide, and the shareholders then confirm, reject or amend them by ordinary resolution.

The shareholder agreement is the third layer and the most detailed. It cannot authorize something the statute prohibits, and it works best when it is consistent with the articles and by-laws. For example, an agreement that requires unanimous approval to issue new shares only has teeth if the share classes in the articles allow the structure the owners want. Changing the articles themselves requires a special resolution, meaning at least two-thirds of the votes cast or a resolution signed by all the voting shareholders, followed by articles of amendment filed with the government.

Why it matters: what happens without one

Without an agreement, you fall back on the default rules in the governing statute, which were not written with your specific business in mind. That is fine until there is real money or a real disagreement at stake. In practice, the statutory defaults look like this:

• The board manages the business, and directors are elected by ordinary resolution (a simple majority of the votes cast). A shareholder with more than 50% of the votes can generally control who sits on the board.
• There is no automatic right for an owner to be bought out when they leave, retire or are excluded from the business.
• There is no built-in mechanism to break a 50/50 deadlock.
• When a shareholder dies, the shares pass to their estate, and the remaining owners may find themselves in business with the deceased's heirs.
• There is no agreed formula for valuing shares, so any buy-out price has to be negotiated from scratch.

When things go badly wrong, the main statutory safety valve is the oppression remedy (CBCA s. 241; OBCA s. 248). A security holder, creditor, director or officer can ask the court for relief where the corporation's conduct, or the way its business or the directors' powers have been exercised, is oppressive or unfairly prejudicial to, or unfairly disregards, their interests. Courts have wide powers under these sections, including ordering a purchase of shares, appointing directors, compensating an aggrieved person, creating or amending a unanimous shareholder agreement, or winding up the corporation. These are court proceedings, though, and they tend to be slow, costly and uncertain. A well-drafted agreement lets owners settle these questions in advance on their own terms.

Do you need one?

If you are the only shareholder, not usually. The moment there are two or more owners, it is worth considering. A shareholder agreement is a legal document tailored to your situation, so it is drafted by a lawyer, not generated from a template. That is separate from incorporating the company itself. Owners commonly put an agreement in place at these moments:

• At incorporation, when two or more founders are starting the business together.
• When a new shareholder comes in, such as a key employee, a family member or an investor.
• When a holding company becomes a shareholder of an operating company alongside other owners.
• Before raising money from outside investors, who often require one as a condition of investing.
• During estate or succession planning, when owners want to decide what happens to their shares on death or retirement.

Putting one in place: a typical sequence

• Step 1. Incorporate the corporation and settle the share structure in the articles.
• Step 2. Issue the shares to each owner and record them in the securities register.
• Step 3. The owners discuss the key business points: control, exits, valuation, funding and restrictive covenants.
• Step 4. A lawyer drafts the agreement; owners often get independent legal advice on it, and an accountant reviews the tax side of buy-outs and insurance.
• Step 5. All parties sign, and the share certificates are endorsed with a reference to the agreement.
• Step 6. A signed copy goes into the minute book, and the agreement is reviewed when owners, values or plans change.

Keeping it in the minute book

Both statutes require the corporation to keep a copy of any unanimous shareholder agreement with its corporate records: CBCA s. 20(1) lists it next to the articles and by-laws, and OBCA s. 140(1) requires a copy of any unanimous shareholder agreement known to the directors. Ordinary agreements are typically filed in the same place. Keeping the signed agreement in the corporate minute book means the directors, new shareholders, lenders and buyers can see the rules that actually govern the company. Whenever shares change hands, the securities register, share certificates and any joinder signed by the incoming shareholder also belong there.

Where Korporex fits

Korporex is not a law firm and does not draft shareholder agreements or provide legal advice. What Korporex does is incorporate the company and set up the share structure that the agreement then builds on, so your ownership is properly established from the start.

Korporex can also prepare an initial minute book with the organizational resolutions, registers and share certificates the agreement sits alongside, and handle a change of shareholders when shares are issued or transferred. If the agreement calls for a different board, a change of directors can be filed with the government. For structures involving a holding company, the agreement and the share structure are usually planned together with a lawyer and an accountant.

Frequently asked questions