Business Venture Blog
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Anything interesting, really.
Anything interesting, really.
Business Venture Blog
Shareholder Agreements vs Unanimous Shareholder Agreements
When incorporating, the question of whether or not to establish a shareholder agreement, or a unanimous shareholder agreement for that matter, should be considered. This blog will cover the major benefits and drawbacks of each while attempting to clarify in what situation each type of agreement is most suitable.
Shareholder agreements outline the expectations and guidelines on how to resolve specific problems that may arise between shareholders. Essentially, these agreements allow shareholders to address any situation in the manner in which they choose. Often, the agreements will establish how corporations make decisions, and how shareholders dispose of or acquire additional ownership interests.
In small, closely held corporations, shareholder agreements are paramount as any change in ownership is typically of great interest to the company and its remaining shareholders. Change in ownership could even result in a material event. Without any such agreement, provincial or federal statute will govern shareholder relationships. Applicable laws tend not to be the most comprehensive and often leave unforeseen situations wanting.
Shareholder Agreement vs. Unanimous Shareholder Agreement
In Canada, there are two types of shareholder agreements, regular shareholder agreements (“SA”) and unanimous shareholder agreements (“USA”).
SAs will only be applicable or bind those who sign it. In order for the agreement to apply to a specific shareholder, that shareholder must be a party or a signatory to the agreement. Note, that shareholders can become a party to the SA at any time. Conversely, USAs bind all shareholders provided that notice is given. No signature required. The USA will apply to any shareholder regardless of when the shares are acquired.
SAs are a form of commercial contract. It may provide rights and obligations to shareholders, resolutions to specific disputes and good management or governance practices. A USA is a combination of a commercial contract and a constitutional document similar to the articles of incorporation. A USA can override the common law rule against fettering the discretion of the directors. This means that it can withdraw or restrict a director’s power and transfer it to the shareholders.
Important Points of Distinction
USAs involve withdrawing or restricting decision-making power from the director and placing that power onto the shareholders. By doing so, directors can no longer be held liable for the rights or liabilities that have been fettered by the USA. Additionally, USAs should be flexible enough to allow minority shareholders to have a say in the direction of the company, but it should also permit the majority of shareholders to make corporate decisions without being blocked or restricted by the minority.
Choosing the Right Structure
Prior to incorporation, one must first characterize the venture. Consider a growth company and a small privately-owned corporation. A growth company is defined by its rate of change. Rapid growth inevitably leads to instability in the corporation’s composition including the number of investors and frequent management changes among other things. Such changes lead to varying corporate and legal needs that are difficult to anticipate. As a result, greater flexibility is needed to avoid impeding growth and development. Small privately-owned corporations have different needs. This type of company opts for stable growth with the ultimate goal of remaining small and closely held. Predictability is key in these organizations.
A SA suits a growth company’s need for flexibility. SAs allow for effective management while the number of passive shareholders tends to increase. USAs are inappropriate for companies that seek rapid growth and anticipate a larger number of investors or shareholders. Essentially, a SA will protect the company from a wide range of shareholders while staying attractive to investment as it doesn’t transfer a disproportionate amount of power to founders as is typical of USAs.
The distinctive characteristics of the USA present challenges to growth companies should a disgruntled founder or shareholder aim to hold up the business’ activities. Further, passive investors won’t want to bear the risk of liability resulting from the transfer of rights and obligations from the directors onto the shareholders. Finally, USAs are part of the constating documents. As such, a growth company is likely to quickly outgrow an agreement written at incorporation. The ability to amend or withdraw a USA requires a unanimous vote as per the Alberta Business Corporations Act, which could be difficult to acquire with a large number of shareholders.
Small Privately-Owned Corporation
USAs are ideal for small, privately-owned corporations. The distribution of shares can be controlled. Shares can therefore remain closely held. For corporations that intend to stay small, USAs can control shareholders and founders in the event of diverging opinions. The agreements allow for all shareholders to have a say in how the business is run. A USA can be drafted to include provisions ensuring the continued operation of the company regardless of founder or shareholder disagreements.
Application to a New Venture
Provisions that are appropriate for a small, privately-owned company may be harmful for a growth company. In particular, USAs are generally inappropriate for growth companies whereas SAs are well-suited for such companies. Prior to incorporation, founders should consider which type of venture is anticipated. Early consideration of the nature of the venture will inform the breadth of desired legal agreements.
 Mihai Gheorghe Cioc, Why should you have a shareholders’ agreement in Canada? Online: LexStart <https://lexstart.ca/en/legal-articles/why-should-you-have-a-shareholders-agreement-in-canada/>.
 Brian Graves, Shareholder Agreements (2005) online: McCarthy Tetrault LLP <https://marcomm.mccarthy.ca/pubs/insight_paper_ver_two.pdf>.
 Mihai Gheorghe Cioc, Why should you have a shareholders’ agreement in Canada? Online: Lex Start <https://lexstart.ca/en/legal-articles/why-should-you-have-a-shareholders-agreement-in-canada/>.
 Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 2nd ed (LexisNexis Canada, 2013) at 2 [Tingle].
 Ibid at 4.
 Ibid at 107.
 Ibid at 106.
 Business Corporations Act, RSA 2000, c B-9, at 146(8).
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