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Writer's pictureFroese Law

Crafting an Effective Shareholder Agreement: Key Considerations Under the CBCA and OBCA

Updated: Nov 22

Shareholder Agreement

A shareholder agreement is a vital governance document for corporations, particularly for those operating under the Canada Business Corporations Act (CBCA) and the Ontario Business Corporations Act (OBCA). While the statutes provide a framework for corporate governance, a shareholder agreement customizes the relationship between shareholders and tailors governance structures to meet the corporation's specific needs. Below is an overview of key considerations for drafting an effective shareholder agreement under the CBCA and OBCA.


1. Importance of a Shareholder Agreement


Shareholder agreements are particularly valuable for private corporations with a limited number of shareholders. These agreements:


  • Define the rights and obligations of shareholders.

  • Mitigate disputes by outlining processes for decision-making and resolving disagreements.

  • Protect minority shareholders and ensure their interests are respected.

  • Provide a clear mechanism for addressing key events such as death, disability, or the sale of shares.


2. Key Provisions to Include


When drafting a shareholder agreement, several critical provisions should be addressed to ensure clarity and fairness among stakeholders:


a. Shareholder Rights and Obligations


Clearly define the rights and responsibilities of each shareholder, including voting rights, dividend entitlements, and participation in management decisions. Consider whether shareholders have pre-emptive rights to purchase additional shares to prevent dilution.


b. Share Transfer Restrictions


To maintain control over the corporation, the agreement should include, at minimum:


  • Right of First Refusal: Requires a selling shareholder to offer shares to existing shareholders before selling to third parties.

  • Buy-Sell Provisions: Establishes mechanisms for the sale or redemption of shares, such as "shotgun clauses" or put/call options.

  • Drag-Along and Tag-Along Rights: Protects minority shareholders during significant sales while ensuring majority shareholder flexibility.


c. Decision-Making and Voting


Specify the threshold for key decisions, such as amendments to articles, corporate bylaws, issuance of new shares, or mergers. This may include requiring unanimous or supermajority approval for critical corporate actions.


d. Management and Governance


Detail the roles of directors and officers, including:


  • How directors are nominated and removed.

  • Provisions for resolving deadlocks in board decisions.

  • Establishing advisory committees or designating specific management powers to shareholders.


e. Financing Considerations


Detail the financing and/or capital injection in the corporation when such is required, including:


  • Capital Contributions: Define the obligations for initial and future capital contributions by shareholders.

  • Debt Guarantees: Clarify responsibilities if the corporation requires loans.

  • Dilution Protections: Address how future financing rounds impact ownership percentages.


A well-drafted financing section ensures that all shareholders are aligned on funding expectations and mechanisms, reducing potential friction.


f. Dispute Resolution Mechanisms


Conflicts are inevitable, and the agreement should include:


  • Mediation or Arbitration Clauses: To resolve disputes without litigation.

  • Deadlock Resolution: A process to address stalemates, such as appointing an independent third party.


g. Exit Strategies


Plan for potential exits by shareholders, addressing:


  • Buyback provisions in the event of retirement, death, or incapacity.

  • Valuation methods for shares.

  • Timeframes and payment structures for buyouts.


h. Confidentiality and Non-Compete Clauses


Protect the corporation’s proprietary information and interests by:


  • Restricting shareholders from disclosing sensitive business information.

  • Prohibiting shareholders from engaging in competing businesses during and after their involvement with the corporation.


3. Compliance with CBCA and OBCA


Both the CBCA and OBCA provide flexibility in tailoring shareholder agreements, but compliance with statutory provisions is essential. Key considerations include:


Unanimous Shareholder Agreements (USAs):


  • Under both statutes, USAs allow shareholders to override certain powers of directors and assume direct control over specified corporate decisions.

  • Ensure clarity on which powers are transferred and align the agreement with corporate law requirements.


Minority Shareholder Protections:


  • Both acts provide remedies for oppression and unfair treatment. The shareholder agreement should ensure balance to minimize the likelihood of oppression claims.


Corporate Record-Keeping:


  • Shareholder agreements must be documented and stored as part of the corporation’s records.


4. Risks of not having a Shareholder Agreement


Operating without a shareholder agreement leaves critical issues to be governed solely by the CBCA or OBCA default provisions. While these statutes provide a framework, they lack the customization and specificity needed for most businesses. Risks include:


  1. Disputes Over Financing: Without predefined rules, disagreements over capital contributions or debt guarantees can halt progress, jeopardizing the corporation’s growth.

  2. Uncontrolled Share Transfers: Without restrictions, a departing shareholder could sell their shares to a competitor or a person with no knowledge of the corporation’s business, risking the corporation’s stability and confidentiality.

  3. Limited Dispute Resolution Mechanisms: Default statutory remedies, such as oppression claims, can be time-consuming and expensive compared to arbitration or mediation outlined in an agreement.

  4. Management Deadlocks: Equal shareholders may face decision-making gridlock, harming operations and strategic direction.

  5. No Exit Strategies: Without a roadmap for handling shareholder exits, disputes may escalate, potentially resulting in court-ordered remedies.


Conclusion


A well-drafted shareholder agreement is an indispensable tool for ensuring stability and clarity within a corporation. By addressing key provisions and aligning with the requirements of the CBCA or OBCA, corporations can foster harmonious shareholder relationships, mitigate disputes, and position themselves for long-term success. Regular consultation with legal counsel and periodic updates will further ensure the agreement remains relevant and effective.


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