Is the Unanimous Shareholder Agreement (also known as a “USA”) Bad for Your Growth Company? The Answer is … Probably!
Written by: Nikolas Kalantzis
Then, why is the USA so commonly used by growth companies and start-ups as the go-to addition to the constating documents? There are some advantages that don’t completely rule it out in certain situations. But, for the vast majority of growth companies out there, stay away – the disadvantages far outweigh the advantages.
What is a USA?
It is a type of shareholder agreement that aims to regulate the conduct of shareholders with respect to one another and the company. Shareholder agreements are concerned with allocating management control and setting out the terms in which shareholders may sell or buy their shares in the company. In general, some kind of shareholder agreement should be used in raising equity for the company.
A USA works to eliminate all or a portion of power from the board of directors and give it to the company’s shareholders. This requires the approval of every current shareholder and will force any future shareholders into the agreement. Shareholder powers will likely include a vast array of rights and privileges that can be highly beneficial or highly obstructive depending on the issues each company faces.
A USA is likely beneficial in only in two scenarios:
(1) Where a private company is anticipating raising capital from a large but individually small group of investors. Here, a USA can force all of the incoming individual shareholders to sell their shares if the majority shareholder (likely the founders) plan to sell their shares at some in the future. This provision in the USA is called a “Drag-Along Right”.
(2) Where a company seeks to be classified as a Canadian controlled private corporation (CCPC) for tax purposes a USA will allow non-Canadian resident investors, as long as Canadian resident investors have the right to elect 50% of the company’s board of directors.
Apart from the above, a USA will likely cause more roadblock’s than create solutions.
(1) USAs are roadblocks in efficient management of a growth company. With a few shareholders a USA may not cause many problems, but once a company grows, multiple shareholders with differing personalities, goals, and opinions will make organization and decision-making extremely difficult.
(2) USAs automatically include every new shareholder. If the relationship between shareholders deteriorates, this could be catastrophic for a company. For example, commonly used “shotgun” provisions, if triggered, requires one shareholder to offer to purchase the others at a specified price but if refused, the other shareholders must then buy the initial offerors shares at the same price. The result may lead to one single shareholder with all the company’s shares and the less equipped shareholders forced out.
(3) USAs are roadblocks to shareholder freedom. Generally, shareholders don’t have a responsibility to anyone’s interests other than their own. Yet, corporate legislation expressly provides that powers exercised by shareholders in a USA are subject to the same kind of fiduciary duties of directors. That likely means shareholders may have duties of disclosure, honesty, loyalty, and candour to the company but no means of resigning those duties like directors.
(4) USAs are not that helpful most of the time. Courts will not always enforce certain provisions that compel a company if they are seen as fettering discretion of the directors. Further, directors may not be excused from their fiduciary duties even though they have lost effective control of the company.
(5) Lastly, USAs are extremely difficult to modify or terminate. The Alberta Business Corporations Act states that every shareholder is a party to the agreement and any amendment requires the consent of all. In cases where the company has outgrown the uses of a USA, such as an IPO or buyout, there will be limited options – especially if shareholders are passive or difficult to reach.
A USA is probably not for your growth company! Nevertheless, there are times where a USA may be appropriate. Every company should pay close attention to the potential roadblocks and benefits before approving a USA.
Nikolas Kalantzis is a member of the BLG Business Venture Clinic and is a 2nd year student at the Faculty of Law, University of Calgary.
 Bryce C Tingle, Start-up and Growth Companies in Canada: A Guide to Legal and Business Practice, 3rd ed (LexisNexis Canada, 2018) at ch 5. [Tingle]
 Tingle, ch 5.
 Ibid; see Business Corporations Act, RSA 2000, c B-9, s 146(7). [ABCA]
 Ibid; Atlas Development Co. v. Calof, 1963 MBQB CarswellMan 20.
 ABCA, s 146(8).
 Tingle, ch 5.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.