A Practical Guide to Share Transfer Clauses in Shareholder Agreements

Written by Ethan Kearl, JD Candidate 2027

Note: The below information does not constitute legal advice. No guarantees are made as to accuracy, completeness, or applicability to individual situations.

Introduction

Shareholder agreements can be a useful tool for many incorporated start-up and growth companies in Canada, especially where there are multiple founders or where the company intends to raise outside capital. [1] These agreements are a contract between shareholders governing how they deal with one another. They outline the rights and responsibilities of shareholders and can create protections for both the shareholders and the corporation.

Under the Alberta Business Corporations Act, if there is no shareholder agreement, the individual(s) who hold more than 50% of the company’s shares can elect the whole board. [2] Although the board is constrained by its duty to act in the company’s best interest, this is hard to determine in practice and the courts rarely overturn directors’ decisions except where there is a conflict of interest. [3] As a result, shareholder agreements are often requested by minority shareholders to protect their interests.

A shareholder agreement may address a wide range of issues, including:

• Transfer of shares, including restrictions, rights of first refusal, and rights of first offer;

• Decision-making processes and voting thresholds;

• Dispute resolution;

• Exit strategies; and

• Confidentiality, non-compete, and non-solicitation clauses.

Since a transfer of shares can transfer the control of a company, founders are often very concerned about who can acquire shares and under what circumstances. This blog will discuss several share transfer clauses that Canadian start-up and growth companies may wish to consider.

Share Transfer Restrictions

Without share transfer restrictions, a shareholder can generally sell to whomever they like. This could include a competitor or someone the other founders would never choose to work with. Share transfer restrictions can protect against these situations, but founders should be careful that these restrictions are not overly burdensome.

A complete ban on selling shares may trap a disgruntled founder in the company. This founder is unlikely to provide value to the company and may cause further headaches. [4] Since growth companies expect to have passive investors, a sale of some shares to an outsider may not be an issue. [5]

For private companies, it is common to restrict share transfers to those approved by the board to ensure compliance with securities laws. Start-up and growth companies may also wish to control, through a shareholder agreement, when founders receive their shares.

Share Escrow vs Vesting Cliff

If a founder leaves a company early, a large percentage of the company’s ownership may be held by someone who is no longer helping grow the business. Share escrow and vesting cliffs both attempt to address this problem by incentivizing retention of founders and sometimes key employees. [6]

Escrowed shares are held by an escrow agent, which may be the company, and are released over time or as tasks are completed. This may be a portion or all of an individual’s shares. Given that start-up and growth companies are unpredictable by nature, tying the release of the shares to specific tasks may be impractical. A task that may have once seemed important may no longer be relevant to the company. This approach risks incentivizing behaviour that is not in the best interest of the company. Therefore, a typical vesting schedule in Canada provides that 25% of the shares issued to each founder vests each year. [7] After the first year, it is common for the shares to begin vesting on a monthly basis.

A vesting cliff, on the other hand, is a release schedule that provides that most (or all) of the escrowed shares are released at some point in the future on the condition that the founder is still employed by the company. [8] In some instances, this may be as many as four or five years in the future. This approach creates a large amount of risk for the founder, as they could lose most or all of their shares just before they vest. Although this practice remains relatively common in Silicon Valley, it is possible that a Canadian court would not enforce this vesting schedule if a claim in equity on the basis of partial performance has been made by the founder or employee. [9]

As a result, a share escrow schedule that provides that 25% of the shares issued to the individual vest per year may provide more certainty of court enforcement while also encouraging founders and key employees to remain with the company.

ROFR vs ROFO

Both a right of first refusal (“ROFR”) and a right of first offer (“ROFO”) restrict the transfer of shares to third parties. A ROFR, also sometimes referred to as “hard rights of first refusal”, requires the selling shareholder to first obtain a bona fide offer from an outside investor to acquire its shares. The selling shareholder must then offer the shares to the other existing shareholders on the same conditions before they are able to transfer the shares to the outside investor.

A ROFO, also sometimes referred to as “soft rights of first refusal”, allows the selling shareholder to offer its shares to the other existing shareholders. If the other shareholders do not accept the offer, the selling shareholder may offer its shares to third parties on terms similar to those offered to the other shareholders.

Both a ROFR and a ROFO may present challenges that founders should be aware of when drafting a shareholder agreement. The inclusion of a ROFR will likely make shares more difficult to sell because investors will be wary of spending the necessary resources to properly research and negotiate the investment only for an existing shareholder to exercise a ROFR and purchase the shares. [10] A ROFO may also present challenges for the company and other shareholders since the selling shareholder can bring an offer to the other shareholders before receiving a bona fide offer. As a result, the selling shareholder is likely able to charge the existing shareholders a premium to avoid the risk of an undesirable purchaser. [11]

Thus, founders should consider whether a ROFR or a ROFO may be appropriate for their shareholder agreement.

Takeaways

Given the unpredictable and rapidly changing nature of start-up and growth companies in Canada, founders should decide early when they will receive their shares, and who can acquire shares and under what circumstances. Shareholder agreements should also be drafted to be easy to amend or replace, as many sophisticated investors may wish to revisit the agreement before contributing capital.

Endnotes

1. Bryce Tingle, Start-Up and Growth Companies in Canada: A Guide to Legal and Business Practice, 4th ed (LexisNexis Canada, 2026) [Tingle].

2. Business Corporations Act, RSA 2000, c B-9, ss 1(1)(k), 106(3).

3. Tingle, supra note 1 at 159.

4. Ibid at 180.

5. Ibid.

6. Ibid.

7. Ibid at 175.

8. Ibid at 174.

9. Ibid at 174.

10. Ibid at 180.

11. Ibid at 180.