Unanimous Shareholder Agreements

What is a Unanimous Shareholder Agreement?

Corporate statutes in Canada[1] provide that a corporation’s default position is to be managed entirely by its directors and officers. This situation can be reversed through the use of a unanimous shareholder agreement (“USA”), which restricts the power of the directors to manage the corporation and instead transfers additional authority to the shareholders. All of the shareholders must agree that they desire to enter into a USA.

Why is a USA useful?

A USA is particularly useful for a closely held start-up company to establish the rules for governing and managing the corporation. The USA will provide mechanisms for resolving deadlocks and govern any transfer of shares. Clarifying expectations between shareholders at the initial stages of organizing the company can be the best way for the corporation to avoid drawn out and expensive disputes in the future.

What are the drawbacks?

Shareholders may become subject to the liabilities normally assigned to directors and officers to the extent that the USA removes powers and responsibilities from the directors and gives it to the shareholders. Protection from liability for shareholders is an important factor in deciding to incorporate a business in the first place. Consequently, any loss of that protection should be carefully weighed.

Typical USA Contents

USAs typically address a number of key measures that are designed to ensure a fair outcome for all parties involved during the course of the corporation’s existence:

  1. Dispute Resolution: Consideration can be given as to how deadlocks amongst shareholders can be resolved. The dispute resolution process may be limited to mediation or binding arbitration, which can be a less expensive alternative than seeking restitution through the courts. Shareholders may also wish to consider whether one of them should have a tiebreaking vote or a veto over certain actions.
  1. Unanimous Shareholder Approval: In the case where one shareholder owns the majority of shares, it is important to consider whether any issues exist that should not be decided by a simple majority vote. A USA can set out a class of material decisions which require supra-majority and/or unanimous shareholder approval to ensure that the majority stakeholder is not able to make unilateral decisions without first obtaining the consent of the other stakeholders involved.
  1. Share Transfer: A USA typically contains a primary rule that no shares can be transferred without the receiver of the shares becoming a party to the USA. This primary rule can be supplemented with a number of additional mechanisms to promote liquidity of the shares:
  • Right of First Refusal: A shareholder who receives a bona fide offer from a third party to purchase his or her shares must first allow the existing shareholders the right to match such offer prior to selling to any third party. This mechanism allows the existing shareholders the option to prevent a third party purchaser from becoming a shareholder and exercising control over the corporation in the future.
  • Buy/Sell or “Shot Gun” Provision: This provision allows one shareholder to offer the other shareholders a price and establish the terms under which he or she is prepared to either purchase the other shareholder’s interests or sell his or her interest to the other shareholders. It is then up to the other shareholders to decide whether they wish to either buy the offered shares or sell their own shares on the same terms and conditions presented. This provision can be very useful in the event of a shareholder dispute where the relationship between the shareholders has broken down and one party wishes to exit.
  • “Piggyback” or “Tag-along” Provision. If a shareholder is able to sell shares to a third-party, a piggyback or tag-along allows the non-selling shareholders to include their shares in the agreement with the third-party buyer. In other words, a shareholder could tag along with the seller and exit the corporation.
  • “Drag-along” Provision. If a majority shareholder decides to sell its shares it can require the minority shareholders to sell their shares to the buyer as well. This allows a majority shareholder to exit the corporation without a minority shareholder blocking the sale.
  1. Funding Considerations: A corporation requires access to capital both upon incorporation and during operation. A USA can prescribe how such capital can be obtained and ensure that each shareholder contributes the requisite amount in conjunction with his or her interest in the corporation or face a penalty for failure to do so. In the case of debt financing, a USA can prescribe how guarantees are to be signed and provide for the sharing of liability among shareholders.

There are several other matters that a USA can address depending on the needs of an organization. We are always happy to discuss how a USA may be of value to your corporation, and answer any question you may have.

Additional Reading:

Canada Business Corporations Act: Unanimous Shareholder Agreements

Chapter 8 – Organizing Your Corporation: The Shareholders

[1] In particular, the Business Corporations Act (Ontario) and the Canada Business Corporations Act

The Seven Key Steps Towards Incorporation

Step 1 – Decide on whether to incorporate Federally or Provincially

Will your operations take place only in Ontario, across the country or internationally?

Step 2 – Decide on your company’s name

Every company needs a name. If you want a unique name, we will conduct a name search to ensure that someone else hasn’t registered your proposed name. If you don’t want a unique name, your company can be registered and known as a numbered company (e.g. 100001 Canada Ltd. or Ontario 101202 Ltd.).

Your name must include one of the following: Limited, Ltd., Incorporation, Inc., Corporation or Corp.

You may also consider registering a trademark for your company name at this point.

Step 3 – Decide on who your directors will be

We will need the name, address and citizenship of each of your anticipated directors. For both Federal and Ontario corporations at least 25% of directors must be resident Canadians, but if you have less than four directors one of them has to be a resident Canadian.

Step 4 – Meet with your accountant

At this point we strongly suggest meeting with an accountant to discuss the following issues:

1)      Shareholdings – You should discuss the tax and practical implications of who the shareholders will be, what types of shares will be issued (common, preferred, voting, non-voting, convertible etc.), how many shares will be issued and what price the shares will be issued for.

2)      Year-end Date – What date makes sense in the life cycle of your business and the availability of your accountant?

3)      Financial Distributions – How are the various stakeholders in the proposed business (you, your business partner, your significant other) going to be compensated by the business (salaries? Dividends? Options?)

We are happy to introduce you to an accountant with experience relevant to your business.

Step 5 – Confirm the following with us

Now that you have met with your accountant, we should be able to easily identify the following stakeholders in your company:

1)      The Shareholders – Their names, addresses and the number and type of shares they are to be issued (at this stage you will also want to consider whether a Unanimous Shareholder Agreement is required

2)      The Officers – Who the President and Secretary will be, and any other anticipated or required officers

We also request the following information:

1)      Signing Authority – Who will have the authority to execute documents on behalf of the corporation? Will there be situations when multiple signatories are required (usually when transactions exceed a certain financial threshold)?

2)      Registered Head Office Address – A residential address is fine

3)      Accountant / Auditor – Name and address of the company’s accountant/auditor

And advise that you consider:

1)      Pre-incorporation Intellectual Property – Prepare an inventory of all the IP owned by the corporation’s stakeholders. These assets need to be properly assigned to the corporation.

Step 6 – Incorporating and organizing the company

At this step we are now ready to incorporate your company. We will conduct the appropriate name searches, register the company with the appropriate governing authority, and prepare a comprehensive minute book that contains all the required corporate documents (by-laws, resolutions, certificates, registers).

Once the minute book is ready, we will schedule a meeting with you where we can walk you through our minute book, and have you execute all of the required documents.

Step 7 – Start your business

Now that your corporation has been organized correctly you can feel free to move forward with common considerations including:

1)      Registering for a Canada Business Number

2)      Registering for a GST/HST Number

3)      Setting up a bank account

We are always happy to discuss any of the steps enumerated above, and answer any questions you may have about the incorporation process.