employment agreement; shareholder agreement, employment contract

The Particulars of Shareholder Agreements

As companies expand, they often acquire new shareholders with a diverse range of interests. These shareholders may desire the protection of their investment in the form of more control and transparency concerning the operation of the business. At the same time, it may be in the interests of the corporation to protect itself from the dilution of ownership and any unexpected actions by shareholders. Both parties may consider a shareholder agreement to pursue these interests.  

The Shareholder Agreement

The shareholder agreement is often an agreement between the corporation and its shareholders to govern their business relationship with additional rules and restrictions beyond those of the corporate articles, bylaws and governing statutes such as the Ontario Business Corporations Act and the Canada Business Corporations Act as they may apply. Shareholders may also form shareholder agreements between each other to govern behaviour and protect their mutual interests.

Unanimous Shareholder Agreements

Shareholders may wish to enter into an even more powerful agreement known as a unanimous shareholder agreement. These contracts restrict the powers of directors of a corporation to manage its affairs. They also allow the shareholders to control specified aspects of the management of the corporation such as the decision to issue new shares or dividends. Under section 107 of the Ontario Business Corporations Act, shareholders who purchase shares in the corporation after the unanimous shareholder agreement is put into place are deemed to be subject to its terms, whether they are aware of the unanimous shareholder agreement or not.

Shareholders who unknowingly purchase shares that are subject to a unanimous shareholder agreement can rescind the agreement that allowed them to purchase the shares by providing notice to the corporation and the transferor of the shares within 60 days of receiving the unanimous shareholder agreement.  Alternatively, the transferor of the shares would be responsible for the payment of fair market value of the shares to the transferee.

Section 146 of the Canada Business Corporations Act similarly allows unknowing shareholders to rescind the share transaction within 30 days of after becoming aware of the unanimous shareholder agreement.

Benefits of Shareholder Agreements

Incumbent owners of a corporation may find a shareholder agreement beneficial because it allows them to dictate the terms on which the company can expand. One of the most common and extensive terms in a shareholder agreement governs the transfer or sale of shares to new individuals. These terms allow companies to prevent the sale of the shares to third parties by including provisions that require offerors to first offer to sell the shares to another shareholder of providing a right of first refusal if that shareholder is approached by a third party attempting to purchase shares. These contractual terms

Due to the close-knit nature of some small corporations, shareholders may be privy to confidential corporate information due to their ownership of the company. Shareholder agreements can protect that confidential information by requiring shareholders party to the agreement to keep it a confidential and secure long-term success for the business.

Without a Shareholder Agreement

Some businesses may not require a shareholder agreement to own or purchase shares in the company. The risk of doing so is that shareholders will only be required to abide by the corporate articles, bylaws and the appropriate governing statute. This doesn’t necessarily allow for tailored solutions to challenges faced by your corporation and it leaves the company vulnerable to actions shareholders may take.

For individual shareholders who have concerns about signing a shareholder agreement, it is equally important to retain competent legal counsel to assist you with understanding the contractual terms and negotiating terms that are aligned with your interests. Most lawyers will tell clients to never blindly sign an agreement due to the risk of being held to terms you did not anticipate.

Contact Us

If you are a corporation or a shareholder and want to know more about the benefits of a tailored shareholder agreement our team of experienced legal professionals at Achkar Law can help. Contact us by phone toll-free at 1 (800) 771-7882 or email us at [email protected] and we would be happy to assist.

If you are a small or medium-sized company looking for full-service support, visit our CLO program page for our strategic solutions.

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Disclaimer: This blog is not intended to serve as, or should be construed as legal advice, and is only to provide general information. It is in no way particular to your case and should not be relied on in any way. No portion or use of this blog will establish a lawyer-client relationship with the author or any related party. Should you require legal advice for your particular situation, fill out the contact form, call 1-(800)771-7882, or email [email protected].