There are various types of shareholder agreements, and a unanimous shareholder agreement is one of them. In this post, we’ll answer the top 3 questions about unanimous shareholder agreements, including:
- What is a unanimous shareholder agreement?
- Why should shareholders consider putting a unanimous shareholder agreement in place?
- What does a unanimous shareholder agreement include?
If you’re a shareholder or a corporation owner, it’s important to know the following information about unanimous shareholder agreements.
What is a Unanimous Shareholder Agreement?
A unanimous shareholder agreement (USA) is a contract about the governance and management of a corporation. The agreement is between all the shareholders of the corporation, and it details their rights and obligations to each other and to the corporation.
The Canada Business Corporations Act defines a USA as a “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.”
The Act explains the purpose of a USA as three-fold:
- To give shareholders the power to govern and manage the business by placing restrictions on the power of directors
- To specify means of dispute resolution
- To dictate how shareholders can join or exit the corporation
A unanimous shareholder agreement works best for corporations with only a small number of shareholders.
Why Should Shareholders Consider Putting A Unanimous Shareholder Agreement In Place?
Having a unanimous shareholder agreement in place provides several benefits to the company and its shareholders. Perhaps the foremost benefit is that it minimizes conflict and empowers owners and shareholders to operate and grow the business without the distraction of defending decisions and trying to protect the company.
It’s common for corporate start-ups to assume conflict won’t be an issue. After all, a business is born of a vision, and people don’t invest in a business if they don’t believe in the vision. Add to this all the other legal matters involved in starting a business, and putting a USA in place is often overlooked.
But a USA is like insurance—you don’t think you need it until you do. Setting up a unanimous shareholder agreement from the start saves a lot of hassle and protects the corporation from costly and lengthy litigation. Its clear plan for decision-making and share transfers helps avoid deadlocks and is particularly useful when share ownership changes unexpectedly.
What’s Included in a Unanimous Shareholder Agreement?
A unanimous shareholder agreement includes provisions that:
- Empower shareholders to govern and run the company
- Resolve disputes and deadlocks
- Decide how shareholders can join or leave the company, and how shares can be transferred
A USA lays out the rights and obligations of shareholders, including fundraising and capital contributions. It provides mechanisms for settling disputes by specifying when a majority vote can be employed and how to resolve other disagreements. And it details how shares can be transferred in specific situations, such as when a shareholder leaves the company or dies.
There are several common provisions in a USA that apply to share transfers, including:
- Drag-along—Prohibits minority shareholders from blocking the sale of the company if a majority shareholder wants to exit
- Piggyback or tag-along—When a shareholder sells their shares to a third party, other shareholders can “piggy-back” or “tag along” on the sale by including their own shares in the deal and exiting the company
- Right of first refusal—Shareholders get the first chance to buy shares that are being sold, even if a third party offers to buy them first
- Shotgun—Typically used when relationships deteriorate and one shareholder wants to exit the company. The shareholder can set the terms and price at which they will sell their shares or buy the shares of another shareholder. The other shareholder(s) must decide if they will buy or sell shares based on the terms and price presented.
What You Should Know Before You Enter a Unanimous Shareholder Agreement
Shareholders should understand that a USA may impose liabilities on them that would otherwise be placed on the directors, such as paying salaries and wages. It’s important to be aware of the risks before signing such a contract.
While a USA provides valuable benefits, it’s not a one-size-fits-all contract. To ensure its effectiveness, your company’s USA should be customized and structured properly for your business.
The corporate lawyers at Getz Collins and Associates can draft a unanimous shareholder agreement for your company. We can review existing agreements and advise shareholders on their rights, and the risks and obligations of entering into a specific agreement. Contact us today.