Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about a shareholder agreement or unanimous shareholder agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me at michael@dynamiclawyers.com to discuss all your shareholder agreements needs!
This is the second blog I’ll be making about unanimous shareholder agreements. Specifically, I’ll be discussing a basic template and things you should consider/pay attention to when thinking about unanimous shareholder agreements. For the purpose of this blog post, I’ll be discussing unanimous shareholder agreements in the context of the Canada Business Corporations Act.
Parties
Make sure to properly identify the parties. You should have the correct spelling of the parties’ names. Also, identifying features such as “X is a corporation incorporated under the laws of Canada with a mailing address at” is also good. If you have too many parties, you may want to use a Schedule, where all of the parties for example are holders of a particular class of shares, etc.
Recitals
Here, you’ll want to put some basic information about the corporation, the parties, and the reason for their entering into a unanimous shareholder agreement. It’s pretty common to see something in this section like:
- The authorized capital of the Corporation is X;
- The issued and outstanding shares of the Corporation is X;
- The parties want to enter into this agreement to fix and determine their respective rights, duties, obligations, etc. with respect to each other and the Corporation.
Preliminary Matters
In the first real section of the unanimous shareholder agreement, you’ll probably want the parties to confirm the truth and completeness of the recitals and define terms used throughout the Agreement.
Business of the Corporation
In this section, you may want to define the business of the corporation. This will come in handy with respect to non-compete provisions and agreements which restrict parties’ ability to compete with the Corporation in the business (however that is defined).
Operation and Control of the Corporation
Here, it’s typical to find provisions that say that the discretion and powers of the directors to manage and supervise the management of the corporation are being restricted and usurped by the Shareholders. Essentially, the Shareholders are relieving the Directors of their powers.
The provisions in this section go on to provide details – often akin to the Corporation’s by laws – on how the Shareholders as both the Directors and the Shareholders will conduct meetings (e.g. nominees, notice, quorum, casting votes, elections and appointments, passing resolutions, etc.).
The provisions in this section may also include specific requirements for the Corporation to enter into contracts (e.g. X number of Directors required) or for the Corporation to do things with respect to issuing shares, borrowing money, selling or leasing Corporate property, amending the Corporation’s articles, continuing the Corporation in another jurisdiction, winding up or dissolving the Corporation, etc. These things may require special majorities (i.e. majorities which are not specified anywhere in the Act).
You’ll also find provisions in this section of the unanimous shareholder agreement dealing with things like who the officers of the Corporation will be, keeping proper books of account, appointing a banker, etc.
Restrictions on the Issue and Transfer of Shares
This is a very important part of any shareholder agreement: restrictions on share transfers. There are many ways to restrict transfers on shares, some of which include:
- General prohibition against the Corporation and the Directors for issuing new shares.
- General prohibition against existing shareholders from transferring, selling, assigning, etc. their existing shares.
- A requirement that any party that does, through one of the permissible ways of acquiring shares, acquire shares becomes bound to and a party of the unanimous shareholder agreement.
Here are some of the ways in which share transfers are permitted/restricted:
- Consent Sale: a shareholder can transfer their shares after obtaining the consent of a pre-determined number or percentage of other shareholders.
- Right of First Refusal: a shareholder who receives an offer from a third party for the purchase of their shares must first offer the other existing shareholders the opportunity to purchase those same shares on terms, for example, that are equivalent to the third party’s offer.
- Shot Gun Buy-Sell: a shareholder can name a price at which it is willing to either buy or sell its shares. The offer is then presented to other shareholders who have a specific amount of time to decide whether to accept the offer.
- Right to Come Along (Piggy-Back): when a shareholder who sells to a third party, the other shareholders are entitled to have their shares sold on, for example, the same terms to that third party.
- Right to Take Along (Drag Along): when a shareholder sells to a third party, the other shareholders are forced to have their shares sold on, for example, the same terms, to that third party.
- Option to Purchase (Call Option): this right gives a shareholder/Corporation the option to purchase shares in certain circumstances (these are called Triggering Events) from the Corporation/shareholder.
- Option to Sell (Put Option): this right gives a shareholder/Corporation the option to sell shares in certain circumstances from the Corporation/shareholder.
- Auction: an auction is a mechanism whereby shares are sold to the highest bidder (or on certain terms of the auction) to third parties.
In each of these circumstances, there are a few common variables: timing or an event occurring, valuing the shares, and rights/obligations affecting the other shareholders, closing provisions, identification of the buyer/seller/third parties (if any), etc.
Confidentiality
If a Shareholder receives Confidential Information (which should be a defined term) in the course of being a Shareholder, Director, Officer, employee, etc. then they should be restricted in what they can do with that information. I’ve previously blogged about confidentiality agreements, so you can refer to that blog for more information about drafting, understanding and negotiating confidentiality agreements here.
Proprietary Rights
This section will deal with things like defining intellectual property rights (remember that there should be a definition for both proprietary rights and developed proprietary rights), who they belong to, the waiving of any moral rights under the Canada Copyright Act, and an agreement to obtain protection of intellectual property rights.
Non Competition
This section will deal with the repercussions, if any, of a Shareholder who starts competing with the corporation in the Business (which should be a defined term). To make these provisions enforceable, they should be specific enough (e.g. by identifying parties, the Business, a time line, etc.).
Termination
Here, provisions may be put in place to initiate termination of the agreement where:
- There is only 1 shareholder left.
- A shareholder dies, becomes disabled, or goes bankrupt, etc.
- There is a breach of the shareholder agreement.
- A specific number or percentage of shareholders mutually agree to terminate the agreement.
General Terms
Here, you’ll find terms dealing with things like (but not limited to):
- Notice (how do the parties give notice under the agreement for things like termination).
- Arbitration.
- Assignment (e.g. is this to be done by the parties having to consent in writing?).
- Survival of terms (i.e. if a term is found by a court to be void, should the rest of the agreement survive?).
- Governing Law (which jurisdiction governs the interpretation and enforcement of the agreement?).
- Amendment (how is this to be done?).
- Entire Agreement (i.e. this agreement supersedes all other agreements – whether oral or written – relating to the same subject matters in the agreement)
- Waiver.
- Interpretation.
- Independent Legal Advice
- Currency.
Please keep in mind that there are many other kinds of terms and conditions you can find in the general terms section of this agreement. You should consult with a lawyer to address these general terms.
Execution
The final section of the agreement (other than any schedules or exhibits) requires that the parties, or duly authorized representatives of the parties with the power to bind, execute the agreement. It is sometimes a requirement that witnesses be present and sign their names alongside the parties’.
In conclusion, this blog has discussed a basic unanimous shareholder agreement template. You should note, however, that the particular details of a unanimous shareholder agreement vary depending on the needs of the shareholders and the business. These documents should be put together by lawyers (such as myself) who are trained, knowledgeable, and experienced professionals.
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