Structure | Shareholders | Directors | Officers | Shares | Shareholders Agreement | Advanced
Unanimous Shareholders' Agreement FAQs
Contact Neufeld Legal for your corporate legal work at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com
What is the legal definition of a "Unanimous Shareholders' Agreement," and how does it differ from a standard shareholders' agreement?
A Unanimous Shareholders' Agreement is a specific statutory instrument defined under Canadian corporate law as a written agreement among all the shareholders of a corporation (including those holding non-voting shares) 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. While a "standard" shareholders’ agreement is a private commercial contract covering various operational matters, a Unanimous Shareholders' Agreement is unique because it is recognized by statute as a governing document that effectively shifts the decision-making authority (and the accompanying legal liabilities) from the board of directors directly to the shareholders. Because it fundamentally alters the corporate governance structure, it requires the signature of every single shareholder to be valid and effective.
To what extent can a Unanimous Shareholders' Agreement strip the board of directors of their powers and transfer that authority directly to the shareholders?
A Unanimous Shareholders' Agreement can be drafted to strip the directors of nearly all their authority, effectively rendering the board a mere formality or even doing away with the requirement for a functional board for most operational decisions. When such an agreement explicitly transfers a power from the directors to the shareholders, the directors are relieved of their rights, powers, duties, and liabilities to the same extent that those powers are assumed by the shareholders. This allows owners in closely-held corporations to exercise direct control over specific management tasks, such as hiring executives or approving large capital expenditures, which would otherwise be the exclusive province of the board of directors.
What are the primary buy-sell provisions (such as Shotgun clauses, Rights of First Refusal, and Piggy-back rights) that should be included?
The buy-sell provisions are the engine of a Unanimous Shareholders' Agreement, designed to manage the exit of a shareholder and maintain the stability of the business. A Shotgun Clause is a mandatory buy-sell mechanism where one shareholder offers to buy another out at a specific price; the recipient must then choose to either sell their shares at that price or buy the initiator out at that same price, ensuring a fair valuation. A Right of First Refusal prevents a shareholder from selling to an outside third party without first offering those shares to the existing shareholders on the same terms. Drag-Along (or Piggy-back) Rights protect majority owners by allowing them to force minority shareholders to join in the sale of the corporation to a third party, ensuring a buyer can acquire 100% of the company without being blocked by a holdout shareholder.
How does a Unanimous Shareholders' Agreement protect minority shareholders from being squeezed out by those holding a majority of the voting shares?
A Unanimous Shareholders' Agreement provides critical protection for minority shareholders by including veto rights over "fundamental changes" that would otherwise only require a simple majority under corporate law. By stipulating that certain actions (such as the issuance of new shares, the sale of substantially all corporate assets, or the amendment of the articles of incorporation) require a super-majority or even 100% unanimous consent, the agreement ensures that the majority cannot dilute the minority's interest or fundamentally change the business without their approval. These provisions act as a safeguard against "squeeze-out" tactics often seen in smaller private companies where minority voices might otherwise be ignored.
In the event of a shareholder's death, disability, or bankruptcy, how does the Unanimous Shareholders' Agreement dictate the valuation and transfer of their shares?
These scenarios are typically classified as "Trigger Events" that mandate a "deemed offer" to sell the affected shares back to the corporation or the remaining shareholders. This prevents shares from passing to a deceased shareholder's estate or a bankruptcy trustee, which would force the remaining owners into business with unintended third parties. To avoid conflict during these difficult times, the Unanimous Shareholders' Agreement usually prescribes a valuation method, such as a pre-set formula based on earnings, a book value calculation, or a requirement for the shareholders to sign a "Certificate of Value" annually to establish a fair price in advance.
Are new shareholders automatically bound by the terms of an existing Unanimous Shareholders' Agreement when they acquire shares in the corporation?
Any person who acquires shares in a corporation that is subject to a Unanimous Shareholders' Agreement is deemed to be a party to that agreement, provided they have notice of its existence at the time of acquisition. To ensure this is enforceable, the corporation must place a restrictive legend on the share certificates stating that the shares are subject to such an agreement. If a new shareholder is not notified, they may have the right to rescind the purchase; however, most agreements are drafted so that any transfer of shares is strictly conditional upon the new owner signing an "Adherence Agreement" to formally join the contract.
What specific dispute resolution mechanisms (mediation, arbitration, or tie-breaker clauses) are typically utilized to resolve a deadlock between shareholders?
When shareholders are split 50/50, a "deadlock" can bring business operations to a complete halt. To resolve this, a Unanimous Shareholders' Agreement often employs a tiered approach: first, a period of mandatory mediation to find a voluntary compromise; second, binding arbitration where a neutral third party makes a final decision; or third, a "tie-breaker" clause such as giving a specific founder or a designated independent party a casting vote. In extreme cases where the relationship is irreparably broken, the Shotgun Clause serves as the final resolution mechanism to end the deadlock by forcing one party to exit the business entirely.
How can a Unanimous Shareholders' Agreement be used to restrict the transfer of shares to outside third parties or competitors?
The Unanimous Shareholders' Agreement is the primary tool for maintaining a "closed" corporation by strictly prohibiting any transfer of shares without the prior written consent of the Board of Directors or a specified majority of shareholders. This ensures that the current owners maintain absolute control over who their business partners are. Beyond just prohibiting sales, the agreement can also include non-compete and non-solicitation covenants that apply to shareholders even after they have sold their shares, preventing them from taking confidential information or clients to a competitor immediately after exiting the company.
What are the potential liabilities for shareholders when they assume the powers and duties of directors under a Unanimous Shareholders' Agreement?
This is a critical consideration for business owners: when shareholders take over the powers of the directors via a Unanimous Shareholders' Agreement, they also inherit the statutory liabilities that come with those powers. In both Alberta and Ontario, this includes potential personal liability for up to six months of unpaid employee wages, unremitted government taxes (such as GST or HST), and certain environmental or health and safety violations. Because the directors are relieved of liability to the same extent they are relieved of power, the shareholders must be prepared to face the legal and financial consequences of the management decisions they choose to control.
What is the formal process for amending or terminating a Unanimous Shareholders' Agreement once it has been executed by all parties?
Because a Unanimous Shareholders' Agreement is by definition "unanimous," any amendment to its terms generally requires the written consent of 100% of the current shareholders. However, well-drafted agreements often include specific "termination events," such as the dissolution of the corporation, the bankruptcy of the company, or a "go-public" event where the shares are listed on a stock exchange. Some agreements also include a "sunset clause" that requires the shareholders to revisit and re-ratify the agreement every few years to ensure it still reflects the current goals and commercial realities of the business..
As such, formulating, drafting and negotiating a shareholders' agreement with Neufeld Legal, will enable you to profer the benefits from the professional services of an experienced corporate lawyer who understands the importance of drafting and implementing the appropriate shareholders' agreement. So if you are looking to enter into a shareholders' agreement for your company, contact us at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or via email at Chris@NeufeldLegal.com.
