When does a business need a shareholder agreement?

Feb 16, 2017

When multiple people own a company, they often have their business lawyer draft a contract, known as a  shareholder agreement, to establish a set of rules and assign obligations to each individual. A shareholder agreement allows a company to establish a legal relationship between the owners of the corporation and creates a legal agreement for how business is conducted.

A shareholder agreement will also address matters such as the shareholder’s obligations to one another, limitations or rules on how shares can be transferred or sold and how the board of directors will be established. The agreement will also include exit strategies for the shareholders, as well as how decisions within the company are approved between shareholders.

Each shareholder agreement should be constructed to reflect the unique circumstances of the company and its owners. However, the major points that a shareholder agreement should address the following:

• Shareholder approvals
• Special roles assigned to shareholders
• Shareholder obligations
• Share transfers restrictions/Right of first refusal/Shotgun clause
• Election of the board
• Pre-emptive rights
• Drag-along rights
• Reverse vesting provisions
• Non-competition and non-solicitation
• Equity investment

When does a business need a shareholder agreement?

If the business is not wholly owned by one individual, for legal protection a shareholder agreement should be drafted. The shareholder agreement will help mitigate risk of litigation by contractually addressing matters that frequently give rise to dispute.

Unanimous Shareholder Agreements

A unanimous shareholder agreement can be drafted only if all shareholders are in agreement. The Canada Business Corporations Act (CBCA), states that a “unanimous shareholder agreement (USA) is an agreement that is among all the shareholders of a corporation and that restricts the powers of directors to manage, or supervise the management of, the business and affairs of the corporation”. (source) The USA is often used as an internal governance for the corporation, which transfers certain powers held by directors to shareholders. In the absence of a USA, the corporation’s directors hold the power to manage the businesses daily affairs.  

Your business lawyer’s role in preparing the shareholder agreement is to understand the shareholders’ objectives and needs and turn this information into a contractual agreement. To learn more about establishing legal agreements for your business or corporation contact one of Chown Cairns Business Lawyers below.