Shareholder agreement for your corporation

What is a shareholders' agreement?

A shareholder agreementshareholder agreementContract governing relations between shareholders: voting, share transfers, exits, disputes.See definition → is a private contract signed by the shareholders of a corporation. The Articles of incorporationArticles of incorporationDocument filed with the registry setting the name, share capital, number of directors and restrictions.See definition → and bylaws set the corporation's basic structure and are partly public; the agreement fills in how the owners will work together, and it stays private between the parties.

No corporate statute requires one. A corporation with a single shareholder rarely needs one. Once there are two or more owners, the agreement is how they decide in advance, while they still agree, what will happen in situations that are hard to discuss later: a partner who wants out, a deadlock on a major decision, an illness, a divorce or an offer to buy the business.

What a shareholder agreement covers

Agreements vary widely, but most deal with the same core topics. The list below describes what these clauses typically contain; which ones fit a given corporation, and how they should be worded, depends on the owners' situation.

• Board and management: how many directors each shareholder can appoint, who holds which officer role, and how day-to-day decisions are made.
• Major decisions: a list of decisions that need the consent of all shareholders or a set majority, such as issuing shares, borrowing beyond a limit, selling major assets or changing the business.
• Funding: whether shareholders must lend or invest more money, on what terms, and what happens if one does not.
• Dividends: the policy for distributing profits, or the rule that dividends are decided case by case.
• Transfers of shares: a right of first refusal for the other shareholders, prohibitions on selling to competitors, and permitted transfers to a holding company or a family trust.
• Tag-along and drag-along rights: the right of minority shareholders to sell on the same terms as the majority, and the right of the majority to require the minority to sell in an approved sale.
• Exit events: what happens on death, disability, retirement, personal bankruptcy, divorce or departure of a shareholder who works in the business.
• Valuation: how the price of shares is set when a buyout is triggered, for example by formula, by agreed annual value or by an independent valuator.
• Non-competition, non-solicitation and confidentiality: obligations of shareholders during and after their involvement.
• Disputes: a deadlock procedure and a path to mediation or arbitration before going to court.

Unanimous shareholder agreement

A unanimous shareholder agreement is a special kind of agreement recognized by Canadian corporate statutes, including the federal statute and Quebec's, under the name convention unanime des actionnaires in French. As its name says, it is signed by all the shareholders. Its distinguishing feature is that it can restrict, in whole or in part, the powers of the directors to manage the corporation, and transfer those powers to the shareholders.

Owner-managed corporations and corporations with a passive investor often use a unanimous agreement so that key decisions are made by the shareholders themselves. Because it shifts powers and liabilities, it is a document where the advice of a lawyer is generally sought.

Buy-sell, shotgun and exit clauses

Exit clauses are the reason many owners sign an agreement in the first place. They decide in advance how a shareholder can leave, or be bought out, and at what price.

• Buy-sell clause: sets the events that trigger a buyout (death, disability, departure, default) and the obligation of the corporation or the other shareholders to buy, or of the departing shareholder to sell.
• Insurance funding: a buyout on death or disability is often funded by life or disability insurance held by the corporation or the shareholders, so that the money is available when needed.
• Shotgun clause (buy-sell offer): one shareholder names a price per share; the other must either sell at that price or buy the offeror's shares at the same price. It forces a fair offer, but can favour the shareholder with easier access to money.
• Right of first refusal: before selling to an outsider, a shareholder must offer the shares to the others on the same terms.
• Put and call options: the right to require a buyout (put) or to force a sale (call), often linked to a shareholder leaving their job in the business.
• Vesting and good leaver / bad leaver terms: the price a departing founder receives can depend on how long they stayed and why they left.

Keeping the agreement up to date

An agreement signed at incorporation describes the business as it was that day. Owners often come back to it when the facts behind it change, because an outdated agreement can trigger the wrong mechanism, at the wrong price, at the worst moment.

• A new shareholder, investor or employee joins, or a shareholder leaves.
• Shares are transferred to a holding company or a family trust.
• The value of the business has changed a lot since the last agreed value.
• Insurance policies that fund a buyout are taken out, changed or cancelled.
• A shareholder marries, separates or moves to another province or country.
• The articles are amended, for example to add a class of shares.

Agreements often include an agreed value per share that the shareholders are supposed to update every year. When nobody updates it, the buyout price on a death or a departure may no longer reflect the business. Keeping the signed agreement and its updates in the minute book, next to the registers, makes it easier to find when it is needed.

Shareholder agreement form or lawyer-drafted agreement?

A shareholder agreement form, built from a template, gives owners a structured document covering the usual topics at a lower cost than a fully custom agreement. A lawyer-drafted agreement is written around the specific situation, negotiated with each party and coordinated with the articles and the tax planning. Many owners start from a template and add a lawyer review when the stakes justify it.

Incorpo's agreement is built from a template: you answer questions on the shareholders, the board, transfers and exits, and the document is generated from your answers. Incorpo is not a law firm and does not tell you which clauses to choose. A review by our partner law firm is available as an option, and that is where advice on your situation comes in.

1. 1QuestionnaireYou describe the shareholders, their roles, the board, the major decisions and the exit events to cover.
2. 2Draft agreementThe agreement is generated from the template and your answers, and shared with all the shareholders.
3. 3Optional lawyer reviewA lawyer from our partner law firm can review the draft and adapt it to your situation.
4. 4Signature and minute bookThe shareholders sign online, and the signed agreement is filed in your digital minute bookminute bookOfficial record holding a corporation’s articles, by-laws, resolutions and registers.See definition →.