When establishing a new company or investing in an already existing one, there are many pros and cons associated with ownership. A common tool used to preserve benefits and minimize risks is an agreement between “two or more shareholders of a company”, or “between a company and some or all of its shareholders”.
A unanimous shareholder agreement (“USA”) is a written agreement among all the shareholders of a company that may completely or partially restrict the powers of the directors to manage, or supervise the management of, the business and affairs of the company. In addition to restricting the power of a company’s directors, a USA will often address other important issues. For example:
To ensure unanimity with respect to a USA, all registered shareholders of all classes, whether voting or non-voting, common or preferred, must be parties to the USA at all times. If a shareholder agreement is not unanimous, it will be treated as a regular commercial contract and, therefore, subject to the articles and by-laws of the company and the provisions of the relevant corporate statute.To ensure conformity with the constating documents of a company, include a provision in both the by-laws and the USA that in the event of inconsistency between them, the USA prevails.
A USA also benefits from the “Deemed Party” rule. The rule applies when shares of a company governed by a USA are transferred, the transferee is deemed to be a party to the USA provided a reference to the USA is noted clearly on any share certificate representing the transferred shares. Despite this rule, it is considered good practice to include in the USA that, as a condition of any share transfer, the transferee must agree in writing to be bound by the USA. Purchasers of newly issued shares from treasury should also be required, as a condition of any issuance of shares from the treasury, to agree in writing to be bound by the USA.
A shareholder’s approach to governance of a company will typically hinge on their particular circumstances (e.g. equal partner, angel investor, venture capitalist, institutional investor, etc.). For example, an equal partner in a company may want to exercise control over all decisions affecting a company, whereas, an angel investor may only want a say in major decisions, such as a merger with another company or sale of substantially all the assets of the company.
Quorum may be based on the absolute number of directors or shareholders present at the meeting. It may include a requirement that a certain shareholder be present in order for any decisions to be made. In such a case, consider allowing a meeting to proceed with less than quorum following a set number of adjournments in case a particular director or shareholder fails to attend. This prevents one party from dictating the company’s progress.
A USA might allow for amendments to the agreement by a specified majority of the shareholders. In order to prevent an agreement being amended by the majority without the knowledge of the minority, a USA should provide that all shareholders must agree to any amendment of the USA.
It is common for a shareholder`s influence over the day-to-day issues of a company to manifest through the appointment of nominees to the board of directors. If nominees are appointed, the USA may dictate situations where a shareholder’s right to nominate directors is reduced or terminated. Directors nominated by a particular shareholder have fiduciary duties to act in the best interest of the company and not the shareholder who nominates them.
A key feature of many USAs is preventing shares from being transferred to unknown or undesirable parties. This objective must however, be reconciled with the desire of shareholders to maintain liquidity of their shares. The following procedures are common when selling shares of a company governed by a USA:
Even if compelled to sell, the transfer of shares should be smooth. A USA should provide detailed transaction mechanics, including time periods for all notices and actions to be taken, as well as details regarding closing dates and procedures.
Shareholders may want to ensure that unwanted parties do not become shareholders involuntarily due to a death of an individual shareholder, an asset transfer following matrimonial proceedings, or a bankruptcy or insolvency of a shareholder in which case a creditor may become a shareholder. A USA can mitigate involuntary share transfers by, among other things, requiring shareholder approval or providing that unless a transfer is approved in accordance with the USA, a new shareholder may not exercise any of the usual rights of ownership, such as voting.
There are several methods that can be used in a USA to determine share price. These include:
A USA will often provide for a number of ways for shareholders to exit the company. These may include:
A USA can include a number of dispute resolution mechanisms for shareholders. Some of them are:
We hope this introduction to USAs is helpful. If you have additional questions, please call or email us any time at (403) 718-9877 or email@example.com.
Legal Education Society of Alberta, “Unanimous Shareholder Agreements for Closely Held Corporations” (2007).
Brian Graves Presentation, “Shareholder Agreements” (2005).
About these authors: Claudius du Plooy has over ten years experience in matters of business law, securities law, commercial real estate development, entertainment law and international trade law.