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Information on legal and business topics from Canadian business lawyer Shane McLean

Unanimous Shareholder Agreements

Posted by Shane McLean on September 22, 2009

A unanimous shareholder agreement is, as the name describes, an agreement among all of the shareholders of a corporation.   The term could be used to describe any agreement among all of the shareholders of a corporation but if you hear someone refer to a unanimous shareholder agreement they are probably referring to an agreement in which the shareholders (and possibly other third parties) agree on certain matters relating to the governance of the corporation and the relationship among shareholders.   Although terms can vary widely, there are typically some common themes you will find in a properly drafted unanimous shareholder agreement:

  • Affairs of the corporation — This can include agreement on high level matters such as who the officers and directors will be down to the minutia such as which bank to use and who may sign cheques.
  • Special Approvals — There may be agreement on certain matters or corporate actions that require approval of a certain directors, shareholders or even third parties.  You see this in  small companies — e.g. with two or three equal shareholders — when the shareholders want to make sure that certain major actions aren’t taken without everyone being in agreement.  You also see it in venture capital backed companies where the venture capitalist seeks to protect their investment by attaching a laundry list of corporate actions that cannot be taken without the investor’s consent (even where the investor may not otherwise control the corporation through ownership)
  • Pre Emptive Right — A pre-emptive right is a right held by all shareholders, or sometimes a subset of shareholders, entitling them to participate in future issuances of securities of the corporation so as to allow each to maintain its ownership of the corporation on a percentage basis.  This is a safety mechanism for shareholders to ensure that the corporation cannot issue a pile of free shares diluting ownership without offering each shareholder the right to buy in on the same terms.
  • Restrictions on Transfer— Typically a unanimous shareholder agreement will contain some restriction on transfer of shares.  This provides other shareholders with some control over who their fellow shareholders are and will be.    These restrictions often include a right of first refusal or right of first offer, both of which essentially provide other shareholders with a first chance to buy shares before a shareholder can go out and sell them to a third party.
  • Drag Along / Tag Along — A drag along right (sometimes called a carry along right) entitles a certain number or percentage of shareholders to force the other shareholders into selling the company.   A tag along right (sometimes called a come along right or piggy back right) is the inverse, allowing shareholders to tag along if other shareholders sell their shares to a third party — i.e. the first shareholder cannot sell unless the third party will buy shares from the other shareholders too.
  • Incapacity/Death/Bankruptcy/Divorce — Unanimous shareholder agreements often include terms dealing the rights of the parties under  these kinds of eventualities.
  • Dispute Resolution — Parties often set out arbitration or mediation requirements in the event a dispute arises.  Some unanimous shareholder agreements include clauses with such ominous names as a  “shot-gun” clause in an attempt to provide shareholders with a way to get out or force their fellow shareholders out of the company.  These clauses should be considered with caution as they can be tricky to prepare and can become  almost unworkable when dealing with more than a couple shareholders.

Interestingly, under many corporate statutes the unanimous shareholder agreement has a special place in that shareholders can use it to restrict the powers of corporate directors and vest those powers in the shareholders, a group of shareholders, a single shareholder or someone else.  The corporate statutes typically go on to say that if a director’s powers are restricted and/or removed by a unanimous shareholder agreement he/she is absolved of any duty in respect of such powers.  However, the party (or parties) named in the unanimous shareholder agreement as having those powers will pick up the duties and liabilities normally assigned to directors.

A unanimous shareholders agreement requires careful drafting to ensure that it meets the needs of a corporation, covers off any special circumstances relating to the corporation or its shareholders and to ensure that it can adequately handle or adapt to different scenarios that may arise in the life of that corporation.

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One Response to “Unanimous Shareholder Agreements”

  1. […]    Unanimous Shareholder Agreements  (September 22, […]

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