Shareholder Agreements in Canada: What They Are and Why You Need One

In the world of Canadian corporate law, shareholder agreements are a critical component of establishing and maintaining a successful business. These agreements serve as the backbone for defining the relationships, responsibilities, and rights of shareholders within a corporation.

In this article, we will delve into the intricacies of shareholder agreements in Canada, their significance, and why every corporation, big or small, should consider having one.

Defining Shareholder Agreements

A shareholder agreement, in the eyes of the law, is essentially a contract. It can be a contract between two or more shareholders of a corporation or between one or more shareholders and the corporation itself. It is a legally binding document that outlines the rights, duties, and obligations of those involved in the corporation, including:

• Voting Rights: Specify who can vote and under what circumstances.
• Ownership: Define the ownership percentages of each shareholder.
• Management: Outline the roles and responsibilities of shareholders in the company’s management.
• Transfer of Shares: Set rules for selling or transferring shares, including restrictions on selling to outside parties.
• Buy-Sell Provisions: Address what happens if a shareholder wants to sell their shares, becomes incapacitated, or passes away.
• Dispute Resolution: Provide mechanisms for resolving disputes among shareholders.

It’s important to note that while shareholder agreements provide a powerful framework, they are still subject to the laws of incorporation that govern the company (such as the Canada Business Corporations Act) and the general principles of contract law under Canadian common law.

The Significance of Shareholder Agreements in Canada

Shareholder agreements are not only crucial for large corporations but also for small and medium-sized enterprises (SMEs) in Canada. SMEs often underestimate the importance of these agreements, assuming they are only relevant for larger organizations. However, SMEs can benefit significantly from shareholder agreements as they are indispensable for several reasons:

• Conflict Resolution: Business relationships can evolve rapidly, and when they do, conflicts often arise. Shareholder agreements provide clear guidelines for resolving these conflicts, helping to navigate murky waters and maintain harmony among shareholders.
• Governance: They define the rules for managing and governing the corporation, including the size and election of the Board of Directors, board meeting procedures, and other essential governance aspects.
  Protecting Minority Shareholders: These agreements can ensure that the rights of minority shareholders are protected against potential oppressive actions by the majority.
• Ownership and Transfer: Shareholder agreements tackle matters related to share ownership, transfer, and sale. They clarify the rights and obligations of shareholders regarding their shares, how transfers occur, and the circumstances under which a shareholder can exit the corporation.
• Addressing Specific Situations: These agreements are essential in addressing specific situations like the death or bankruptcy of a shareholder, ensuring a smooth transition without disrupting the business.
• Legal Compliance: In the absence of a shareholder agreement, the corporation is governed solely by provincial or federal laws, which might not cover all matters that shareholders wish to address. Shareholder agreements empower parties to take control of their relationship and address any issues they deem necessary.
• Breach of Contract Claims: One of the primary reasons for having a robust shareholder agreement is to prevent and manage breach of contract claims. Should a party default on their obligations, the aggrieved shareholder can resort to legal action.

Imagine a situation where a shareholder unexpectedly passes away. Without a shareholder agreement, their shares might pass to their heirs who may not have the skills or interest in running the business. With a well-drafted agreement, the remaining shareholders can have a mechanism in place to buy back those shares and continue the business without disruption.

Types of Shareholder Agreements

In Canada, two primary types of shareholder agreements provide businesses with flexibility in structuring their corporate governance and decision-making processes:

• Regular Shareholder Agreement (SHA): This agreement binds only the shareholders who have signed it. Therefore, new shareholders must explicitly sign an existing SHA to be bound by its terms.
• Unanimous Shareholder Agreement (USA): A USA binds all shareholders, and it comes into effect when all shareholders of the corporation consent to it. Future shareholders are also bound by it upon notice, with the consent of future shareholders not being required unless notice isn’t served, allowing new shareholders to rescind share purchases.

The Differences Between SHA and USA

Regular shareholder agreements (SHA) and unanimous shareholder agreements (USA) in Canada share similarities in the topics they cover but differ in scope, objectives, and obligations.
Scope:

• SHA binds only the shareholders who have signed it, requiring new shareholders to sign to be bound.
• USA binds all shareholders, with the consent of future shareholders not required, provided notice is served.

Objectives:

• SHA primarily provides guidelines for shareholder rights, obligations, dispute resolution, and governance.
• USA may restrict or withdraw some or all of the powers held by directors.

It’s essential to understand these differences when choosing between a regular shareholder agreement and a unanimous shareholder agreement in Canada. Both types of agreements have their merits, and the choice between them depends on the corporation’s goals, structure, and the preferences of its shareholders.

The Role of the Legal Professional

Navigating the intricacies of a shareholder agreement necessitates expertise. A legal professional, well-versed in both contract and employment law, plays a pivotal role. They can:

• Draft and Review: Ensure that every clause, stipulation, and term is legally sound and in the best interest of the client.
• Mediate Disputes: In the event of disagreements among shareholders, a legal professional can act as a mediator, helping parties reach a consensus without resorting to costly litigation.
• Update Agreements: Laws and business conditions evolve. Periodic reviews and updates of shareholder agreements by a legal professional ensure they remain current and compliant.

In summary, shareholder agreements are an investment in the stability and longevity of a business, regardless of its size, and can be a powerful tool for strategic planning and risk management. Regardless of the size and location of your corporation, a well-crafted shareholder agreement can protect the interests of both the corporation and its shareholders. It provides a structured framework for dealing with conflicts, disputes, and unforeseen events.

Back to blogs