In a small business context, it is very common for more than one individual to own a significant portion of the corporation. For example, two individuals may each own 50% of the corporation’s shares or three individuals may own 1/3 of the shares of the corporation, etc. As shareholders of the corporation, it is important that you turn your attention to such issues as: how the corporation will be governed, rights regarding the issuance of new shares or sale of shares, how the shareholders can terminate their relationship in the event of a conflict, and how the shareholders will govern themselves after leaving the corporation.
How can the foregoing issues be adequately addressed? A Unanimous Shareholder Agreement.
Forms & Types of a Shareholder Agreement
There are various forms of shareholder agreements. At its simplest, a shareholder agreement is an agreement amongst one or more shareholders governing the relationship between the shareholders in relation to the Corporation.
A more powerful and specific form of a shareholders agreement is a unanimous shareholder agreement.
What is a Unanimous Shareholder Agreement?
Pursuant to the Ontario Business Corporations Act and the Canada Business Corporations Act, a unanimous shareholder agreement is essentially an agreement entered into by all shareholders of the corporation which restricts the powers of the Directors to manage and supervise the corporation.
Therefore, all shareholders of the corporation must be a party to the agreement and the powers of the Directors must be restricted by the agreement.
Aside from its definition, what makes a unanimous shareholder agreement unique is the legal status that has been granted to a unanimous shareholder agreement. The law has elevated the status of a unanimous shareholder agreement to the level of a constating document of the Corporation. In essence, a unanimous shareholder agreement is on par with the Articles of Incorporation.
Features & Benefits of a Unanimous Shareholder Agreement
The benefits of a Unanimous Shareholder’s Agreement are vast, and include the ability to:
- Increase or decrease the voting threshold for directors’ and shareholders’ meetings;
- Address repayment of Shareholder Loans;
- Shareholder rights regarding the Issuance of Shares;
- Exit Strategies for shareholders, including: Rights of First Refusal, Piggy-back rights, and shot-gun clauses;
- Non-Competition, Non-Solicitation, & Confidentiality Clauses.
Next Steps for the Small Business Owner
It can be overwhelming for many small business owners to envision all the various scenarios outlined above. Indeed, it can be even more daunting to have to consider the scenario that would see a shareholder leaving the corporation, especially at the start of the business venture. However, it is precisely at this time, when the relationship is amicable, to address the matters included in a unanimous shareholder agreement.
In essence, a unanimous shareholder agreement is a proactive rather than a reactive measure. It allows the shareholders of the corporation to have a document to govern their conduct as shareholders so the Corporation can focus on financial success!
Stay tuned for the next blog posting on how to sell your business and recoup the fruits of your labour….
*Please note that this is not intended to be legal advice, but a general, non-comprehensive discussion.