An Introduction to Unanimous Shareholder Agreements
Managing a successful corporation requires nimble decision-making, delicate balancing of competing priorities, and detailed organizational planning. While sometimes overlooked – especially when a business grows quite quickly – organizational planning is the glue that keeps the company together no matter what comes your way.
A solid understanding of your rights and obligations as a shareholder is an important step in ensuring the long-term viability and success of the business. With this in mind, you may want to consider whether or not your corporation could benefit from a Unanimous Shareholder Agreement (USA). Not sure what that is or why it’s important? Read on to learn all about USAs.
Define a Unanimous Shareholder Agreement (USA)
According to the Canada Business Corporations Act (CBCA), “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.” This is different from standard Canadian corporate statutes whereby a corporation’s default position is to be managed entirely by its directors and officers. All shareholders must agree to enter into a USA.
What are the benefits of a USA?
The main advantage of a USA is that it typically contains provisions in two main areas: decision making and share transfers, which are particularly helpful in the case of deadlocks or an unexpected shift in share ownership as a result, for example, of the bankruptcy or death of a shareholder. A USA is generally recommended whenever there are two or more shareholders in a closely held corporation. The process of establishing a USA can also be incredibly beneficial, particularly during the initial stages of organizing the company, as it defines expectations and creates provisions which will ideally prevent lengthy, expensive, and potentially damaging disputes in the future.
Are there any disadvantages?
As per the Supreme Court of Canada, the USA provision is described as:
[P]roviding a mechanism by which the shareholders, through a unanimous agreement, [can] strip the directors of some or all of their managerial powers as desired by the shareholders. Rather than removing the directors from their positions, a USA simply relieves them of their powers, rights, duties, and associated responsibilities. This may be accomplished without specific formality… What is in effect created is an “incorporated partnership” with statutory force.
As a result, however, stakeholders assuming the powers and responsibilities of directors may then become subject to the liabilities typically assigned to those directors. This loss of protection from liability is something that should be carefully considered.
What provisions are usually included in a USA?
When one shareholder owns majority shares in a corporation, it is important to solidify in a contract what decisions are not to be decided by a simple majority vote. According to Toronto-based boutique law firm, Wakulat Dhirani, LLP, a company’s USA can identify “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.”
Share Transfer : Most USAs require, as a primary rule, that share transfers are contingent on the receiver becoming a party to the USA. Additional provisions under this rule may include:
- Right of First Refusal : Existing shareholders get first crack at the chance to match a bona fide offer that a shareholder receives from a third party to purchase his or her shares thus, potentially, preventing a third-party purchaser from becoming a shareholder if it is deemed not in the best interests of the company.
- “Shot Gun” Provision : This provision is especially useful in the event that relationships between shareholders deteriorate and one party wishes to exit. It allows a shareholder to establish the terms and price under which he or she is prepared to either sell his or her own shares or purchase shares from another shareholder. Based on the terms and conditions presented, the other shareholders decide whether or not to buy the offered shares or sell their own shares, depending on the situation.
- “Piggyback” or “Tag-along” Provision. In the event that a shareholder chooses (and is able) to sell shares to third-party, this provision gives other shareholders the opportunity to include their shares in the agreement with the third-party buyer, essentially allowing those additional shareholders the opportunity to ‘tag along’ and exit the corporation.
- “Drag-along” Provision. This provision prevents minority shareholders from blocking a potential sale of the company should a majority shareholder wish to exit the corporation. Essentially it ensures that if a majority shareholder decides to sell his or her shares, minority shareholders will be required to sell their shares to the buyer as well.
Dispute Resolution : This is an important aspect to include in your USA. Potential resolution measures may include mediation or the assignment of a tiebreaking vote or veto to an individual shareholder over certain actions.
Capital Requirements : At different stages of a corporation’s existence, access to funding will be important. A USA can establish how capital is obtained and prescribe penalties should shareholders fail to contribute the requisite amount based on their interests in the corporation. A USA can also determine how liability will be shared and how guarantees will be signed should the need for debt financing ever arise.
Much like learning the ropes of running an organization, there is much to know about corporate law and to what end different provisions and agreements will best serve the long-term interests of your business. Consult with a legal expert to help guide your unanimous shareholder agreement provisions so that they are tailored to your organization’s specific needs.