Shareholder Agreements

Overview: 

A share is a form a property representing an ownership interest in a corporation. A share can come with any or all of the following rights, among others:

1. A right to attend shareholder meetings and vote on matters affecting the business of a corporation, primarily the election of directors;
2. A right to receive dividends when declared by the directors; and
3. A claim over the assets of a corporation; 

Shareholder Agreements: 

Shareholder agreements are agreements entered into by either some or all of the shareholders of a corporation. The agreement must be in writing and signed by all parties to the agreement. Although shareholder agreements remain specific to each corporation, they often encompass and govern similar issues.  Shareholders are capable of entering into agreements, which restrict the director’s powers in managing the company whether in or whole or in part. Any assumption by the shareholders of the management duties of directors may result in the director’s personal liability also being shifted to those shareholders, effectively undermining the limited liability protections a shareholder would otherwise enjoy.  

Within a smaller corporation, the shareholders tend to be more proactive in the sense that each person has a say in the significant business decisions of the corporation. Shareholder agreements are not necessary for a sole shareholder corporation. They typically only employed when there is more than one shareholder, or when a corporation wants to bring in investors. 

Right to sit on the Board: 

Typical for smaller corporations (typically those with less than about 6 shareholders), shareholder agreements typically contain provisions that gives each shareholder the right to sit on the board, or nominate a candidate or representative to do so. This is done by each shareholder agreeing within the document to have their shares voted for in such a way that each shareholder is successfully represented on the board. As a result, this allows for an equal representation on the board of directors.

Shareholder Approval: 

A shareholder agreement can modify the threshold of approval for specific decisions proposed to be carried out by a corporation. An example of this can be seen through the sale of the business. Even though the Alberta Business Corporations Act and its federal equivalent stipulate that such a proposed action only requires a special resolution of the shareholders, or two thirds of the votes in order to sell the business, the shareholder agreement is capable of modifying this to require a unanimous decision by all shareholders in order to sell the business. 

Purchase of Shares:

Often included within a shareholder agreement are the rules pertaining to the future issuance of shares. Here, all of the shareholders are capable of agreeing to maintain or uphold the same percentage of holdings amongst themselves. This in effect, allows for no further shares to be issued without the unanimous consent of the shareholders, which protects minority shareholders from having their share interest diluted by the majority, which is possible without a shareholder agreement.  

Share Transfers: 

Shareholder agreements often contain restrictions on the ability of a shareholder to transfer or sell  shares.  The agreement can also provide for a list of events that would force a shareholder to sell their shares. It is crucial that anyone considering entering into a shareholder agreement with partners have that shareholder prepared or reviewed by a lawyer to ensure they are made aware of these clauses. Failure to do so may result in a shareholder being forced out of their own company, without recourse.