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.[1] 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.[2] 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”.[3]

(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.[4]

Apart from the above, a USA will likely cause more roadblock’s than create solutions.  

The problems:

(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.[5] 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.[6] 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.[7] 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.[8] 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.[9]
The takeaway:

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.


[1] 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]
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Tingle, ch 5.
[6] Ibid; see Business Corporations Act, RSA 2000, c B-9, s 146(7). [ABCA]
[7] Ibid; Atlas Development Co. v. Calof, 1963 MBQB CarswellMan 20.
[8] ABCA, s 146(8).
[9] Tingle, ch 5. 

There is no “one size fits all” solution available when a new venture requires a shareholder agreement. The question of whether a Unanimous Shareholder Agreement (“USA”) should be used over a conventional shareholder agreement is one that entrepreneurs should consider when the time comes to put a shareholder agreement in place. This question is also likely to spark a debate (although, not a particularly exciting one) among lawyers. This blog post sets out to explain the main differences between USAs and conventional shareholder agreements.
What is a USA?
USAs are a creature of statute. It is imperative that entrepreneurs turn their minds to which statute their business is incorporated under, as this will determine whether their agreement amounts to a USA. The corporate statutes in all provinces except British Columbia and Nova Scotia contemplate the existence of USAs. The Canada Business Corporations Act (“CBCA”) defines a USA as being:
An otherwise lawful written agreement among all the shareholders of a corporation, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation....[i]
In contrast, the Alberta Business Corporations Act (“ABCA”) defines a USA as being:

1. a written agreement to which all the shareholders of a corporation are or are deemed to be parties, whether or not any other person is also a party...

that provides for any of the matters enumerated in section 146(1)....[ii]
These matters include the rights and liabilities of the parties, election of directors, management of the corporation’s business and affairs, or restriction of director powers.[iii] It is worth noting that it is possible to inadvertently enter into a USA by satisfying one of the statutory definitions above. If, for any of the reasons that follow, an entrepreneur does not want to create a USA, the shareholder agreement should explicitly state that it is not meant to be a USA.
How are USAs Different than Conventional Shareholder Agreements?
USAs are unique in that a person can become a party to the USA without signing it. If a USA is in effect when a person acquires a share of the corporation, that person is deemed to be a party to the agreement and will be bound by it.[iv] This means that those who invest in future equity financings carried out by a corporation will be bound by a USA (if one exists).
Another important distinction is the fact that, when the shareholders are exercising powers that have been transferred from the directors, they are subject to the same fiduciary duty attracted by directors in the ordinary course of their business. A consequence of this is that shareholders making decisions in place of the directors will lose their ability to pursue their own interests.[v] Shareholders acting in place of directors pursuant to a USA must act in the best interests of the corporation.[vi] In contrast, shareholders that are a party to a conventional shareholder agreement are free to act in self-interested ways.
Finally, it is often much more difficult to amend or terminate a USA in comparison to a conventional shareholder agreement. For CBCA corporations, it is uncertain as to whether a court would uphold the termination of a USA executed by any fewer than all the shareholders.[vii] The amendment or termination of a USA in the context of ABCA corporations certainly requires the consent of all shareholders.[viii] Termination provisions in conventional shareholder agreements can have a much more relaxed structure.
When Should a USA be Used?
Generally speaking, start-up growth companies should steer clear of USAs; however, there are certain situations in which a USA may be advantageous.
Firstly, a corporation may anticipate a turn of events that will result in a significant amount of its shares being widely held by individual investors – in this situation, a USA would provide an effective means to bind each one of these new shareholders to the terms of the corporation’s shareholder agreement.[ix]
Another situation in which the creation of a USA may be advisable is when a corporation whose shares are held primarily by non-Canadians wishes to be classified as a Canadian Controlled Private Corporation (“CCPC”) for tax purposes. If Canadian resident shareholders possess the right to appoint a majority of the board of directors by virtue of a USA, the corporation will qualify as a CCPC despite the fact its shares may be owned primarily by non-residents.[x]
Again, USAs are often not advisable for use in start-up growth companies mainly due to the fact that both current and future shareholders are bound by them. Conventional shareholder agreements provide a higher degree of flexibility and allow shareholders to consider only their personal interests.

Thomas Machell is a member of the BLG Business Venture Clinic and is a third-year law student at the Faculty of Law, University of Calgary.

References
[i] Canada Business Corporations Act, RSC 1985 c C-44 at s 146(1) [CBCA].
[ii] Business Corporations Act, RSA 2000, c B-9 at s 1(jj) [ABCA].
[iii] Ibid at s 146(1).
[iv] CBCA at s 146(3); ABCA at s 146(2) and 146(3); Note that recourse is available for persons who acquire a share of a corporation that is subject to a USA if they did not receive proper notice of the agreement’s existence.
[v] Bryce C Tingle, Start-up and Growth Companies in Canada, 3rd ed (LexisNexis, 2018) at 103 and 104 [Tingle].
[vi] BCE Inc v 1976 Debentureholders, 2008 SCC 69 at para 37.
[vii] Tingle at 106.
[viii] ABCA at s 146(8).
[ix] Tingle at 107.
[x] Canada v Bioartificial Gel Technologies (Bagtech) Inc, 2013 FCA 164 at para 58.