Building a Shareholder Agreement That Grows with Your Business

A shareholder agreement (“SHA”) is one of the most important governance documents for a privately held company. While corporate statutes establish default rules for how corporations operate, a SHA allows owners to tailor those rules to reflect how the business is actually managed and how ownership relationships may evolve over time. 

For founders, these agreements help clarify expectations among owners, establish decision-making processes, and provide a framework for growth. This article outlines the foundational elements involved in building a SHA and highlights the information business owners should consider when developing one. 

What is a SHA? 

A SHA is a contract between some or all of a company’s shareholders that governs their relationship with one another and establishes how certain corporate decisions will be made. 

Corporate statutes such as the Canada Business Corporations Act (“CBCA”) and the Ontario Business Corporations Act (“OBCA”) provide default rules. A SHA allows shareholders to customize those rules to fit their particular business needs. 

Types of SHAs 

Under Canadian law, SHAs are commonly structured in two ways. 

Unanimous Shareholder Agreements (“USAs”) 

A USA is an agreement among all shareholders of the corporation that restricts, in whole or in part, the powers of the board of directors and may transfer those powers to the shareholders. 

Key features of a USA include: 

• All shareholders must be parties to the agreement 

• Certain director powers may shift to shareholders 

• Shareholders who assume those powers may also assume corresponding legal responsibilities to the extent of those powers 

• Often used in closely held corporations where owners are actively involved in the business 

For founder-led companies, a USA can allow shareholders to maintain more direct control over key corporate decisions.  

Non-Unanimous Shareholder Agreements 

Not every shareholder agreement needs to be unanimous. In corporations with multiple investors, only some shareholders may be parties to an agreement. 

These agreements typically: 

• Do not restrict director authority in the same way as a USA 

• Establish contractual rights and obligations between certain shareholders 

• Are commonly used where there are outside investors or minority shareholders 

• Provide flexibility for companies with evolving ownership structures 

Determining which agreement is appropriate depends on the company’s ownership structure, governance goals, and anticipated growth. 

Core Issues Every SHA Should Address 

Although the specific terms vary from business to business, most SHAs address several core governance issues. These provisions form the foundation of most SHAs 

Decision-Making Authority 

A SHA clarifies how key corporate decisions are made. 

Typical questions include: 

• Which matters require board approval? 

• Which decisions require shareholder approval? 

• Are there certain decisions that require enhanced voting thresholds? 

Examples of decisions that may require additional approval include: 

• issuing new shares 

• approving major transactions 

• amending corporate documents 

• borrowing significant funds 

Voting Rights and Thresholds 

The SHA also establishes different voting thresholds depending on the importance of the decision. 

Common structures include: 

• Simple majority for routine operational matters 

• Supermajority (e.g., 67% or 75%) for major corporate decisions 

• Unanimous approval for fundamental changes affecting ownership or control 

Defining these thresholds helps prevent uncertainty and reduces the risk of disputes when important decisions arise. 

Share Transfer Restrictions 

Privately held companies often restrict how shares can be sold or transferred. These provisions help ensure that changes in ownership occur in an orderly and predictable way. 

Common mechanisms include: 

• Right of First Refusal (“ROFR”): Existing shareholders have the first opportunity to purchase shares being sold 

• Tag-Along Rights: Minority shareholders can participate if a majority shareholder sells their shares 

• Drag-Along Rights: Majority shareholders can require minority shareholders to participate in a sale of the company 

Customizing the Agreement to Fit the Shareholders 

While most SHAs address the same core governance issues, the specific terms are typically tailored to reflect the shareholders involved and how the business operates in practice. 

Two companies may face very different considerations depending on the roles and expectations of their shareholders. 

In many private companies, shareholders may include: 

• Founders who actively manage the business 

• Passive investors providing capital 

• Employees receiving equity incentives 

• Family members involved in ownership but not day-to-day operations 

Each group may have different expectations regarding control, decision-making authority, and liquidity. The SHA helps align those expectations by establishing clear governance rules. 

Information That Helps Shape the Agreement 

In practice, the effectiveness of a SHA depends heavily on the information gathered at the outset. Developing a SHA involves understanding how the company operates today and how ownership relationships may evolve over time. During the drafting process, lawyers will often ask business owners to consider questions such as: 

Ownership Structure 

• Who are the current shareholders? 

• Are additional shareholders expected in the future? 

• Will shares be held personally or through holding companies or family trusts? 

Governance and Decision-Making 

• How are major business decisions currently made? 

• Are all shareholders involved in management, or are some passive investors? 

• Should certain decisions require enhanced approval thresholds? 

Growth and Investment Plans 

• Does the business expect to raise capital from outside investors? 

• Will employees receive equity-based compensation? 

• Are there plans for acquisitions, partnerships, or expansion? 

Providing this information early allows the SHA to reflect how the business actually operates and helps ensure that the governance structure remains workable as the company grows. 

Looking Ahead 

A SHA is designed to guide the relationship between owners as the business evolves. As companies grow, bring in investors, or transition ownership, SHAs may need to be revisited to ensure they continue to reflect the business reality.