If you have an incorporated business, it is imperative to consider which agreements you need in place for your particular business to protect yourself if other shareholder’s want to exit the business.
Let’s first understand what a Shareholder agreement is.
A shareholder agreement is between individuals who hold shares for the same corporation. It establishes the responsibilities of the board of directors and officers for that corporation and also rights of majority and minority shareholders of the corporation.
It is valuable to have in place when the corporation only has a few shareholders. It is not filed with any governing body but is similar to any other business agreement and is usually kept within your corporation’s minute book.
When a Shareholder Agreement is not required
If you are the sole director and the sole shareholder of your business, a shareholder agreement is not required. It is typically an agreement among multiple shareholders of a corporation. If you operate a business on your own and have chosen to incorporate, you don’t need a shareholder’s agreement until you decide to share the ownership of your business with another person by creating and selling some of the shares.
Likewise, if you are creating a not-for-profit corporation you don’t need a shareholder’s agreement as this is only meant for corporations that are generating a profit. Federally incorporated not-for-profit corporations and non-soliciting corporations have the option to enter into a “unanimous members agreement” (UMA) which is alike in function to that of a unanimous shareholder’s agreement for private corporations, it allows the members of non-soliciting corporations that are federally incorporated under the Canada Not-for-profit corporations act (CNCA), to restrict the power of the directors and officers to manage and supervise the affairs of the corporation. UMA’s, members can limit the director’s authority to appoint officers, remove a director’s power to make changes to a by-law by resolution and restrict the management authority that a director of the corporation would otherwise have.
Benefits of having a Shareholder Agreement
It sets out the rights of existing shareholders and when new shares of the corporation are issued or sold. Existing shareholders also have a “right of first refusal” where if an existing shareholder wants to sell their shares, these shares are first offered to existing shareholders based on their pro rata share before being offered for sale to a third-party buyer. The benefit of this type of condition is that it protects existing shareholders from co-ownership of the business by a third party.
Similarly, the agreement can also provide for pre-emptive rights for shareholder’s where newly issued shares of a corporation are first offered for purchase to existing shareholders of a corporation. A shareholder’s agreement also can have clauses where minority shareholders are given the right to sell their shares in a corporation to a third party on similar terms as the majority shareholder. Similar to a right of first refusal, this clause protects minority shareholders from third-party majority shareholders of a corporation. The third party must be prepared to buy all of the shares from both the majority and the minority shareholder. Also provides shareholders with control over who has ownership of a corporation by giving existing shareholders the authority to approve new shareholders of the corporation.
Shares of a corporation upon the death of a shareholder
A shareholder’s agreement can be used to avoid this outcome by stipulating what happens to shares when a shareholder dies. In a circumstance where a shareholder has passed away, then their shares are paid into their estate along with their other assets. These shares are not inevitably offered to the other shareholders of the corporation through a right of first refusal, the beneficiary of the deceased shareholder based on their Will or through inheritance rules in the absence of a Will becomes the new shareholder in the corporation.
At Juriscorp Law, we’re here to help legal matters easier to understand and manage. If you have a question about your business’ share structure or need help understanding your shareholder rights, give us a call. Our experienced corporate team can help you navigate through all of your legal questions.