The way in which Corporations are structured can be tricky, especially if there are a handful of Shareholders. But it doesn’t have to be and today, our Corporate/Civil legal team breaks down what it means to have a Unanimous Shareholder Agreement.
Corporations are governed by legislation, such as the Alberta Business Corporations Act, their individual Articles of Incorporation, and the Corporate By-Laws. In the event there are multiple shareholders, these shareholders may wish to further articulate and set out procedures for events not contemplated in the legislation and constating documents (Certificate of Incorporation/Articles of Incorporation and others). A Unanimous Shareholder Agreement (yes this is abbreviated as “USA”) can provide a flexible way to structure the obligations of shareholders and set out methods for the resolution of disputes between them. A Unanimous Shareholder Agreement as the name suggests requires the consent of all shareholders at the time of signing and is usually instituted early on in a corporation’s existence.
Shareholders may want to adopt a Unanimous Shareholder Agreement to help mitigate and manage risk. Shareholders may have varying degrees of capital they have invested into the corporation and therefore smaller shareholders may wish to preserve their interests by way of an agreement. A USA can be used to limit the scope of power of a majority shareholder to make minority shareholders more comfortable with the arrangement. In the event of a dispute, having an agreement to set out how the dispute is to be addressed, can significantly reduce the costs of resulting litigation, if not eliminate them. The initial cost of creating a Unanimous Shareholder Agreement drafted at Hayes Fry Law is a wise investment.
The following are some common issues which a USA will address:
Selection and Removal of Directors: The shareholders may agree upon a method of selecting and/or removing directors. This may also include guaranteeing certain shareholders a position on the board. The shareholders may also stipulate what matters would require unanimous approval.
Right of First Offer/Right of First Refusal: The right of first offer requires that shares will be offered to other existing shareholders for purchase before soliciting offers from third parties. The right of first refusal requires that a shareholder who receives an offer to purchase their shares from a third party must offer the shares to the existing shareholders on the same terms of the offer before accepting the third-party offer.
Tag-along/Drag-along provisions: The tag-along provision protects minority shareholders. In the event a majority shareholder sells their shares, the tag-along provision allows minority shareholders to participate in the sale on the same terms. The drag-along provision protects majority shareholder rights. Through the drag-along provision, if the majority shareholder is selling their shares, they can force minority shareholders to also sell their shares, which will lead to a higher selling price as the corporation as a whole is being sold.
Shotgun provisions: The shotgun provisions are invoked when a shareholder needs to exit the corporation. Often this will occur in the context of disputes between shareholders where the parties can no longer function together. The shotgun provisions allow for a shareholder to offer another shareholder a price per share to buy them out of the corporation. The offer can be accepted, or the shareholder can offer to buy the offeror’s shares at the same price. The end result is that only one of the shareholders remains.
Non-Compete/Non-solicitation provisions: A non-competition provision prevents a shareholder from competing with the corporation for a period of time. A non-solicitation provision prevents a shareholder from hiring from the corporation’s pool of employees for a period of time. These provisions can be vital to the corporation should a shotgun provision be executed, and a shareholder exit the company with the expertise and knowledge to start their own competing company.
Further provisions relating to financing, dispute resolution, confidentiality, and more can be included in a Unanimous Shareholder Agreement. The contents of a Unanimous Shareholder Agreement are negotiated between shareholders and can be carefully tailored to each specific corporation.
Our corporate lawyers at Hayes Fry Law know Corporate and Civil law well and we can assist in the negotiating process and drafting of a Unanimous Shareholder Agreement. Give us a call at 780.831.7370 and we can set up an appointment. Or, you can email us directly here.