Understanding your

Unanimous Shareholders Agreement

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Disclaimer

The following is no substitute for advice provided by a lawyer specifically for you. It is intended only to help you understand that advice. No responsibility is taken for any problems arising except due to paid legal advice.

©1996 Jaques Law Office. All Rights Reserved.

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Introduction

A Unanimous Shareholders Agreement is an agreement, like any other, but more. By law, it can take powers and responsibilities normally held by directors, and transfer them to the Shareholders. Further, if there is proper notice (to the Corporations Branch, and a notation on share certificates), it can bind future shareholders, whether they sign or not. Yet, it is an agreement, so can be enforced like any other contract.

Some common clauses are explained, below.

Whereas

• sets out relevant context of agreement (for interpretation purposes)

Purpose

• sets out goals of agreement (for interpretation purposes)

Definitions

• sets out special or expanded or restricted meanings of specified words (for interpretation purposes)
• note that death, inactivity, and withdrawal, are often defined in special ways to affect when shares must be bought/sold
• note that the agreement often provides for holding shares via Holding Company, to permit flexibility to do just that in the future.

Declaration of Unanimous Shareholders Agreement

• this spells out that the agreement is a 'Unanimous Shareholders Agreement' (and therefore affects new Shareholders whether they sign or not)
• note that it forbids any transfer/issuance of shares except according to this Agreement or by consent (often unanimous consent is required)

Costs

• this often calls for Shareholder indemnification to other Shareholders for this type of Shareholder loan for the costs specified. In other words, if Shareholder A dips into his/her pockets to pay these corporate expenses, then not only the corporation, but the other shareholders must pay him/her back.

Director's Powers

• where this agreement reduces the director's powers, it consequently increases Shareholder's liability

Board of Directors

• Shareholders often agree to impeach a director who tries to circumvent this agreement

Shareholder's Participation

• may include minimal level of activities
• may include restriction of competition. To be enforceable, it must be reasonable. A common version is to forbid competitive activities for 5 years within Saskatchewan.
• our version permits the Company to choose actual or liquidated damages (a pre-specified amount) for a breach

Shareholders' Meetings

• sets out procedures for Shareholder's Meetings and powers. Some will simply recite the provisions of the law, for convenience of reference. Some will alter the law.
• sets out special procedures for special things. This often requires unanimous approval for incurring debt over a specified amount, benefits to insiders, etc.

Directors' Meetings

• sets out procedures for Directors' Meetings and powers. Some will simply recite the provisions of the law, for convenience of reference. Some will alter the law.
• sets out special procedures for special things. This often requires unanimous approval for incurring debt over a specified amount, benefits to insiders, etc.

Profits, Benefits

• sets out the intended policy of distribution. Often, benefits shall be pro rata to holdings, plus director's fees (if paid), plus wages (if work done and if approved according to agreement)

Shotgun Buy/Sell

• this is one of the mechanisms for ensuring that the corporation does not die if a shareholder dispute arises. In this case, a Shareholder can deliver notice to buy at a specified price to an offeree. The offeree can choose to sell or buy at that price but has no other choices. This ensures that the ejected shareholder will receive a fair compensation.

Controls on Share Ownership

Right of First Refusal

• Shareholders may sell shares to outside parties, but must first normally give the company and/or the other Shareholders a chance at the same terms.

Sale by Holding Company to Affiliate

• so long as Affiliate is controlled by the holding company and continues to be so controlled, the sale of shares is normally permitted

Sale of Shares upon notice

• in certain extreme conditions, a fast sale must be forced. In such a case, terms are set out in advance, in the Unanimous Shareholder's Agreement, to be as fair as possible. It is common to be available in the following circumstances:
  • where a Shareholder is 'inactive', dead, or disappeared
  • where a shareholder's property (and therefore shares) is in jeopardy, such as from a Matrimonial/Family Property Action, or the shareholder is insolvent
• the terms should set out:
  • interest
  • time of closing
  • terms of payment
  • the value of the shares (by some fair method, but normally higher in the event that the shareholder was innocent (e.g., death))
  • a method of handling loans between the company and the shareholder
  • the value of options
  • an obligation for the other Shareholders to chip in (because, under the law, the company cannot buy shares unless it passes the legal 'solvency' test.)
  • whether the Company must keep life insurance policies to finance this, and how this is to be enforced and administered

Corporate Loans from shareholders

• may set out cases in which the Shareholders agree to will pay more if required. May include
  • guarantee of any necessary loans for the company
  • indemnification of those Shareholders which do pay more, usually in proportion to their share-holdings.
  • restriction of the clause - may require that the disbursement was approved at a proper meeting called for that purpose.
• may set out how loans from Shareholders are to be repaid. Usually provides that:
  • the company shall repay in proportion to the amounts owing
  • it shall be paid immediately if a Shareholder sells out (properly)
  • neither a Shareholder nor their successor shall demand payment if it would endanger the company.

Arbitration

• sets out the type of disputes which must be arbitrated (i.e., parties must use arbitration in substitution for court)
• sets out procedure, including
  • how to commence
  • who shall judge
  • what may be decided
  • how it may be decided

General

• important legal clauses necessary for most agreements (boilerplate). Note the importance of ensuring the company has the current address for each Shareholder.

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