What is a Shareholder?

A party becomes a shareholder in a corporation when shares are issued to them from the corporation in exchange for money paid, property transferred, or past services rendered to the corporation. Shares can also be acquired through purchasing existing shares from another shareholder, as long as this complies with applicable securities laws.

Shareholders hold certain rights, powers, and duties such as:

• Election of Directors
• Right to Receive Financial Statements
• Right to Appoint Auditors
• Approval of Fundamental Changes
• Submission of Proposals at Meetings, if they have voting power

Shareholder Agreements

There are risks and benefits to be aware of when establishing a new business or potentially investing in an existing corporation. Parties considering these ventures should create a contract to minimize risks and maintain the benefits.

A shareholder agreement is a typical contract for corporations with more than two shareholders to manage these risks. There are several elements in shareholder agreements; however, they will vary depending on the individual needs. There is broad scope in negotiating and drafting a shareholder agreement. A shareholder agreement can potentially outline how the parties of the corporation will operate and how important decisions will be made.

Critical Provisions for Shareholder Agreements:

A shareholders’ agreement can address the following matters:

• The election and composition of the board of directors;
• What constitutes a fundamental matter, and who gets to approve them;
• When a shareholder can transfer their shares, and restrictions relating to that transfer:
  • Right of first refusal
  • Drag along
  • Tag along
• Pre-emptive rights; and
• What happens if a shareholder dies, becomes disabled or is unable to work in the business (usually a shotgun clause).

Shareholder Agreement vs. Unanimous Shareholder Agreement:

While a shareholder agreement is a contract between more than one shareholder and is viewed as a commercial contract, it is subject to the articles and by-laws of the corporation and the provisions of the relevant corporate statute. A shareholder agreement binds only the shareholders that signed the agreement, and any future shareholders will have to expressly sign the existing agreement to be bound by it.

A unanimous shareholders’ agreement, authorized by s.146 of the Canadian Business Corporations Act (“CBCA”), is in some facets created from the statute. Therefore, it can restrict the directors’ powers and bestow such powers to the shareholders of a corporation. This is done for the supervision and management of the corporation’s matters. A unanimous shareholder agreement does not require consent for future shareholders, as long as a notice is provided. 

The need for a unanimous shareholder agreement would be to:

1. Override the discretion of directors;
2. It forms part of the contesting documents for specific purposes;
3. They are considered in all provinces except for British Colombia, Nova Scotia, and P.E.I.

The provisions set out in a unanimous shareholders’ agreement allow shareholders to contract out of statutory requirements of the CBCA such as: limiting a director’s discretion in an individual capacity and requiring altered voting percentages for directors’ or shareholders’ resolutions.

Why should you include a shareholders’ agreement or a unanimous shareholders’ agreement? Business relationships are constantly evolving. A complete and comprehensive agreement benefits your business because it avoids risks and conflict; it lays the foundation and groundwork for the guidelines and structure of your business. 

If you have any questions on whether you need a shareholders’ agreement or would like to discuss your corporate organization, please feel free to contact Stephen Sforza at stephen@durhamlawyer.ca or by phone at 905-668-4486 ext. 239.

“This article is intended to inform. Its content does not constitute legal advice and should not be relied upon by readers as such. If you require legal assistance, please see a lawyer. Each case is unique, and a lawyer with good training and sound judgment can provide you with advice tailored to your specific situation and needs.”