The Ontario Business Corporations Act (also referred to as the “OBCA”) provides a robust framework for incorporating and governing corporations in the province. It outlines the rights and responsibilities of shareholders, directors, and officers, and establishes a foundation for corporate management and operations. However, the OBCA does not delve into every detail of shareholder interaction. This is where shareholder agreements come into play. While the legislation sets out the ground rules for incorporation and general management, a shareholder agreement allows shareholders to establish additional, customized terms pertaining to their unique business relationship.
This blog post delves into the world of shareholder agreements in Ontario, outlining their benefits, key provisions, and the importance of consulting with legal counsel to assist with drafting and enforcing such agreements.
What is a Shareholder Agreement?
A shareholder agreement is a legally binding document that sets out the terms, responsibilities, and rights of shareholders and forms part of any company’s foundation. It provides a legal substructure for functional and financial decisions while establishing the control and obligations of the parties involved. Shareholder agreements generally address how shareholders interact with each other, decision-making processes, and dispute-resolution mechanisms.
A corporation may implement two types of shareholder agreements: a general shareholder agreement and a unanimous shareholder agreement.
General Shareholder Agreement
A general shareholder agreement is a document that establishes fundamental guidelines regarding shareholders’ relationships and rights within the corporation. It is treated as a commercial contract between the involved parties and is subject to the corporation’s by-laws and articles of incorporation, along with applicable legislation. Although these types of shareholder agreements offer great flexibility, as they can deal with a vast range of issues, they may be difficult to negotiate and must be tailored to meet the needs of the parties. Most general shareholder agreements cover matters including shares and ownership, rights and obligations of shareholders, decision-making processes and share transfer processes. However, a key benefit of negotiating a general shareholder agreement is that shareholders may better understand the goals of the other shareholders and the corporation as a whole.
Unanimous Shareholder Agreement
A unanimous shareholder agreement is a specific type of shareholder agreement that manages the relationship between shareholders and authorizes the transfer of authority from directors to shareholders. The Ontario Business Corporations Act allows shareholders to restrict the powers of directors to supervise or manage the affairs of the corporation. Unanimous shareholder agreements offer a high level of control and specificity, with key features including restricted share transfers, decision-making matters, dispute resolution processes and exit strategies. To qualify as a unanimous shareholder agreement, the document must be written and signed by all shareholders and must, in some manner, restrict the powers of the directors managing the corporation. These types of shareholder agreements can also bind future shareholders without requiring their signature or the creation of a new document, provided that the share certificates include a notice of the agreement’s existence.
Do I Need a Shareholder Agreement?
Although shareholder agreements are not required by all companies in Ontario, they are important documents that offer an additional layer of protection for those involved. They provide significant value to businesses of various sizes and structures and act as a manual for the corporation’s shareholders. Shareholder agreements are commonly used by:
- Closely held companies where a small number of shareholders hold a significant stake in the company in order to regulate relationships and mitigate potential disputes.
- Startups and newly established ventures that seek to set clear expectations and address potential future scenarios from the beginning.
- Businesses seeking to attract investments by providing assurances to potential investors regarding their protections, rights and terms of their investment.
- Partnerships and joint business ventures that outline the rights and responsibilities of each partner and address how decisions will be made and profit-sharing matters.
Key Components of a Shareholder Agreement
A comprehensive shareholder agreement is a crucial instrument for business operations. While each shareholder agreement may vary on the exact issues addressed within it, shareholder agreements generally address matters such as:
- Identifying shareholder rights and responsibilities;
- Outlining decision-making processes;
- Setting out dispute resolution and deadlock resolution mechanisms:
- Safeguarding minority shareholders;
- Facilitating share transfers; and
- Provide strategies for business continuity.
Obtaining Legal Assistance for Your Shareholder Agreement
Shareholder agreements are complex documents; therefore, working with a skilled corporate lawyer who can help you negotiate and draft a custom and comprehensive shareholder agreement to meet your needs is important. A lawyer will help you negotiate key terms and will ensure your agreement contemplates complex scenarios. They will help you customize the agreement to the shareholders’ and corporation’s unique needs and goals. A lawyer will also ensure that your shareholder agreement is drafted with clarity and precision and is compliant with applicable laws and regulations. Throughout a corporation’s lifetime, your business lawyer can review existing shareholder agreements to ensure they remain up to date with changing circumstances and legal requirements within the business landscape.
Key Considerations Regarding Shareholder Agreements in Ontario
Shareholder agreements are powerful tools for Ontario corporations. By fostering clear communication, establishing a customized governance structure, and protecting shareholder interests, shareholder agreements can promote a harmonious and successful business partnership. However, given their weight and the importance of their content, consulting with an experienced business lawyer is essential to ensure your shareholder agreement is comprehensive, legally sound, and serves the long-term goals of your corporation. With a well-crafted shareholder agreement in place, you can proceed with peace of mind while navigating your business journey with greater confidence and clarity.
Contact the Corporate Lawyers at Bader Law in Mississauga & Oakville for Assistance with Shareholder Agreements
At Bader Law, our skilled team of business lawyers work closely with business owners and entrepreneurs in Mississauga and Oakville to develop a legally sound and effective strategy to address your business needs. We help clients negotiate and draft comprehensive shareholder agreements designed to mitigate risk and conflict while addressing complex issues. We also advise clients on how to proactively anticipate and address potential future issues. Contact us online or by phone at (289) 652-9092 to schedule a consultation with a member of our business law team to learn how we can assist you.