What are the benefits of a Unanimous Shareholder Agreement?
Did you know there are different types of shareholder agreements? In this post, we’ll look at Unanimous Shareholder Agreements, including:
- What a Unanimous Shareholder Agreement is,
- What’s included in a Unanimous Shareholder Agreement,
- Benefits of a Unanimous Shareholder Agreement, and
- Disadvantages of a Unanimous Shareholder Agreement.
Here’s what you need to know about Unanimous Shareholder Agreements (USAs).
What is a Unanimous Shareholder Agreement?
A Unanimous Shareholder Agreement (USA), according to the Canada Business Corporations Act, is a written contract between all the shareholders of a company, and its purpose is to:
- Empower shareholders to govern and run the company by restricting directors from managing or supervising the management of the business and affairs of the company,
- Provide ways to settle disputes, and
- Decide how shareholders can join or exit the company.
A USA is typically used by companies with a small number of shareholders.
What is included in a Unanimous Shareholder Agreement?
A Unanimous Shareholder Agreement covers 2 key areas:
- Decision-making, and
- Share transfers and restrictions.
A USA determines what decisions can be made by a majority vote and how disputes can be resolved, and specifies how shares can be transferred in various situations (such is the death or disability of a shareholder, or when a shareholder wants to leave the company). The agreement should also detail shareholder obligations, including fundraising and capital contributions.
Most USAs require that shares only be transferred to a receiver who joins the USA. Common additional provisions include:
- Right of first refusal—Existing shareholders get a chance to match a third-party offer to buy shares
- Shotgun—Shareholders can establish the terms and price of their shares (either when buying or selling shares)
- Piggyback—If one shareholder sells their shares to a third party, other shareholders can include their shares in the agreement and exit the company
- Drag-along—Minority shareholders cannot block a potential sale of the company if a majority shareholder wants to exit the company
What are the benefits of a Unanimous Shareholder Agreement?
The primary benefit of a Unanimous Shareholder Agreement is that it serves to minimize risks and conflict in the company. This allows shareholders and company owners to focus more on running and growing their company rather than spending their time defending business decisions and trying to protect the company.
A USA is especially helpful for closely held startup companies with shareholders who prefer to settle disputes internally instead of involving corporate lawyers. Establishing a USA during the initial stages of setting up a company lays the groundwork for a successful business and healthy shareholder relationships by defining expectations.
Because of the decision-making provisions included in a USA, it helps to avoid deadlocks. The share transfer provisions are beneficial when share ownership changes unexpectedly.
What are the disadvantages of a Unanimous Shareholder Agreement?
Before entering into a Unanimous Shareholder Agreement, it’s important to consider the risks. A USA effectively turns the company into an “incorporated partnership with statutory force”, according to the Supreme Court of Canada.
Of primary concern is that, under a USA, shareholders take on liabilities that would normally be assigned to directors, such as paying salaries and wages.
Another potential issue is that a USA may grant equal rights to new shareholders. This can be a negative thing to original shareholders with history and long-term experience with the company who don’t feel newcomers should automatically have the privilege of company management.
A risk for minority shareholders who enter into a USA is that they may not have a voice in decisions involving majority shareholders.
Legal Help for Unanimous Shareholder Agreements in Alberta
If you decide to create a Unanimous Shareholder Agreement for your corporation, we recommend you consult with all the shareholders and come up with a list of provisions and conditions you want to include. Then contact a corporate lawyer to draft your USA.
If you’re a shareholder who’s been asked to sign a USA, consider consulting a corporate lawyer to ensure that your rights are protected.
The award-winning corporate lawyers of Osuji & Smith are experienced in drafting and reviewing Unanimous Shareholder Agreements and can help and advise you with all your corporate and business law matters.
