1.
Why
You
Need
a
Shareholders
Agreement
Canadian
and
Ontario
corporate
laws
(the
Canada
Business
Corporations
Act
or
Ontario’s
Business
Corporations
Act;
the
“CBCA”
and
“OBCA”,
respectively)
provide
a
suitable
framework
for
corporations
that
have
a
large
number
of
shareholders.
However,
these
laws
have
a
number
of
shortcomings
as
they
apply
to
private
corporations
that
are
controlled
by
a
small
number
of
shareholders.
Some
of
these
shortcomings,
and
the
manner
in
which
they
may
be
address
by
an
agreement
among
all
of
the
shareholders
(a
“unanimous
shareholders
agreement”
or
“USA”),
are
described
in
this
section.
A
summary
of
typical
provisions
included
in
a
USA
is
contained
in
the
second
section
of
this
article.
Not
all
provisions
will
apply
in
each
USA
and
the
appropriate
provisions
will
depend
on
the
nature
of
the
business,
existing
shareholdings
and
the
corporation's
immediate
and
long
term
intentions.
Management
&
Control
Under
these
laws,
corporations
are
managed
by
their
directors.
Shareholders
elect
directors,
but
otherwise
are
given
little
say
over
a
corporation’s
business
and
affairs.
Shareholders
elect
directors,
and
approve
certain
fundamental
changes
to
a
corporation,
by
exercising
the
voting
rights
attached
to
their
shares,
generally
by
majority
vote
(over
50%
or,
for
some
decisions,
over
66
2/3%).
This
works
well
for
shareholders
of
public
corporations,
for
whom
the
ownership
of
shares
is
a
passive
investment,
but
may
not
be
appropriate
for
many
private
corporations.
Consider,
for
example,
the
common
scenario
of
a
private
corporation
that
has
two
to
five
shareholders
actively
involved
in
the
business.
One
or
more
shareholders
owning
over
50%
of
the
shares
that
have
voting
rights
may
be
in
a
position
to
elect
themselves
alone
as
directors,
such
that
they
make
all
management
decisions,
leaving
the
remaining
shareholders
without
any
authority
over
management
of
the
corporation.
A
USA
can
ensure
that
each
shareholder
gets
a
say
in
management
by
requiring
that
they
be
elected
as
directors,
by
restricting
decision-­‐making
of
a
corporation’s
directors
in
favour
of
its
shareholders
(that
is,
the
shareholders
can
agree
that
they
make
certain
management
decisions
themselves
instead
of
the
directors),
or
by
requiring
that
certain
decisions
be
made
unanimously
(or
by
more
than
a
simple
or
two-­‐thirds
majority).
Sale
of
Shares
Unlike
a
public
corporation,
the
shares
of
a
private
corporation
cannot
be
sold
easily
–
without
being
traded
on
a
stock
exchange,
it
can
be
very
difficult
to
find
a
buyer
for
shares
of
a
private
corporation,
and
any
sale
of
shares
may
require
approval
by
the
directors
or
by
a
majority
of

2.
2
the
shareholders.
While
there
are
legal
and
business
reasons
for
restricting
the
sale
of
shares
of
a
private
corporation,
a
USA
will
often
permit
the
sale
of
shares
in
specified
circumstances
(described
in
the
next
section
of
this
article),
providing
a
limited
amount
of
liquidity.
In
addition
to
permitting
the
sale
of
shares,
it
may
be
appropriate
in
a
USA
to
require
shareholders
of
a
private
corporation
to
sell
their
shares
where
they
cease
to
be
actively
involved
in
managing
the
business,
as
a
result
of
death,
disability
or
departure
(resignation
or
termination),
or
where
there
is
a
dispute
among
shareholders
that
cannot
be
resolved.
These
circumstances
can
be
very
disruptive
to
the
management
of
a
corporation’s
business,
but
in
absence
of
a
USA,
a
shareholder
cannot
generally
be
forced
to
sell
his
or
her
shares.
A
description
of
some
of
these
sale
provisions
is
contained
in
the
next
section
of
this
article.
A
USA
may
also
facilitate
or
restrict
the
sale
of
the
entire
corporation
or
its
business
by
requiring,
for
example,
all
shareholders
to
sell
their
shares
or
the
corporation
sell
all
its
assets,
on
terms
approved
by
a
majority
of
shareholder
or
a
higher
approval
threshold.
These
provisions
are
described
in
the
next
section
of
this
article.
Distribution
of
Profits,
Management
Compensation
Shareholders
of
a
corporation
are
generally
entitled
to
participate
in
any
profits
of
a
corporation
in
proportion
to
the
number
of
shares
they
own,
when
and
if
the
directors
decide
to
declare
a
dividend.
They
may
also
participate
in
the
proceeds
of
a
sale
of
the
corporation
or
its
assets
in
the
same
proportions.
Shareholders
who
are
also
actively
involved
in
the
business,
as
employees
or
management
(or
often
both)
may
also
receive
salaries
and
bonuses.
Where
the
only
shareholders
of
a
private
corporation
have
invested
equal
amounts
in
the
corporation
and
have
equivalent
management
roles,
it
may
be
appropriate
that
they
receive
equal
salaries
and
dividends;
and,
if
they
are
in
a
similar
financial
position
and
are
similarly
ambitious,
it
may
be
straightforward
to
decide
to
pay
themselves
very
modest
salaries
(or
none
at
all)
and
retain
all
profits
for
use
in
the
business
(rather
than
pay
any
bonuses
or
dividends).
However,
where,
as
frequently
the
case,
the
contributions
of
shareholders
are
not
equal
(either
in
amounts
invested
or
the
work
they
perform)
or
they
have
different
financial
needs
or
drive
to
grow
the
corporation,
leaving
these
decisions
to
the
directors
(some
or
all
of
whom
may
also
be
shareholders
and
employees)
can
be
contentious
and
favour
the
interests
of
a
majority
shareholder.
These
matters
can
be
set
out
in
a
USA
or
it
can
contain
a
mechanism
for
deciding
them
that
ensures
that
the
interests
of
various
shareholders,
whether
they
be
full-­‐time
employees
of
the
corporation
or
passive
investors,
are
protected.

3.
3
Financing
the
Business
Private
corporations
experiencing
significant
growth
generally
need
external
capital,
but
are
restricted
in
their
ability
to
raise
money
by
issuing
shares
(without
“going
public”
and
listing
their
shares
on
a
stock
exchange)
and
bank
loans
can
be
hard
to
obtain
for
a
corporation
that
generates
little
excess
cash
with
which
to
pay
off
loans
and
interest.
Corporations
cannot
require
their
shareholders
to
make
further
investments
(either
as
equity
or
debt)
or
provide
personal
guarantees
that
lenders
may
require,
although
this
requirement
may
be
including
in
a
USA.
Even
if
shareholders
are
not
required
to
contribute
capital
when
needed
by
a
private
corporation,
they
may
want
the
right
to
approve
the
issuance
of
additional
shares
or
the
right
to
purchase
any
additional
shares
issued
(a
“pre-­‐emptive
right”)
to
prevent
their
ownership
from
being
diluted,
or
the
right
to
approve
borrowing
by
the
corporation.
Absent
a
USA,
these
decisions
are
left
to
the
directors
of
a
corporation.
Confidentiality,
Non-­‐Solicitation,
Non-­‐Competition
&
Other
Business
The
shareholders
of
a
private
corporation
often
have
information
about
the
corporation
not
generally
available
to
the
public,
preserving
the
secrecy
of
which
may
be
essential
in
order
to
maintain
its
competitive
advantage.
Unless
they
are
also
employees,
officers
or
directors
of
the
corporation,
shareholders
may
not
have
any
obligation
to
maintain
the
confidentiality
of
that
information,
and
may
use
it
to
engage
in
a
competitive
business.
It
may
also
be
appropriate
to
limit
a
shareholder's
ability
to
contact
past,
present
or
in
some
cases
prospective
clients,
suppliers
and/or
employees.
To
address
this
concern,
confidentiality,
non-­‐solicitation
and
non-­‐
competition
provisions
are
often
included
in
a
USA.
A
USA
may
also
clarify
that
a
shareholder
is
NOT
restricted
from
owning,
or
participating
in
the
management
of,
a
business
other
than
that
carried
on
by
the
corporation.
This
is
less
commonly
addressed
in
a
USA,
but
may
be
important
for
a
shareholder
who
is
a
director
or
officer
of
the
corporation
and
also
owns
or
engages
in
another
business,
particularly
if
that
other
business
is
similar
to
the
corporation’s
business.
Absent
a
provision
in
a
USA
that
expressly
permits
this,
the
shareholder
may
breach
fiduciary
duties
to
the
corporation
as
a
director
or
officer
by
engaging
in
the
other
business
even
if
not
in
direct
competition
with
the
corporation
and
the
other
business
is
not
something
the
corporation
wishes
or
is
able
to
pursue
itself.

4.
4
Summary
of
Typical
Provisions
Included
in
a
USA
Provision
Explanation
ADMINISTRATION
OF
THE
CORPORATION
General
Administrative
Affairs
of
the
Corporation
A
USA
often
includes
provisions
to
govern:
• Directors
–
number,
how
they
are
appointed/resign/removed
• How
major
decisions
are
made,
including
thresholds
for
shareholder
or
director
voting
required
for
certain
decisions
–
for
example:
simple
majority,
2/3
majority,
or
unanimous
• When,
where
and
how
shareholders'
and
directors'
meeting
are
held
• Who
may
sign
and
enter
into
agreements
on
behalf
of
the
corporation
Limitation
of
Director
Duties
The
shareholders
can
transfer
duties
from
the
directors
to
the
shareholders.
For
example,
the
USA
could
limit
the
directors'
discretion
to:
• issue
shares;
• make,
amend
or
repeal
by-­‐laws;
• appoint
officers;
• fix
the
remuneration
of
directors,
officers
and
employees;
or
• borrow
money,
give
guarantees
or
grant
security
interests
in
the
corporation’s
property.
FINANCING
Financing
Generally
The
USA
may
address
how
the
corporation
is
to
raise
funds.
It
can
lay
out
when
and
on
what
terms
it
could
take
loans
from
shareholders,
whether
it
can
seek
third
party
equity
investors,
what
lenders
it
may
borrow
from,
when
dividends
are
distributed.
Borrowing
from
an
Institutional
Lender
Most
of
the
time,
a
USA
will
contemplate
that
the
corporation
will
seek
to
finance
the
corporation
through
external
financing.
There
is
sometimes
a
requirement
that
the
corporation
try
to
obtain
funds
externally
before
turning
to
the
shareholders.
As
most
institutional
lenders
will
seek
guarantees
from
new
corporations,
the
USA
may
contemplate
that
shareholders
are
required
to
enter
into
guarantees
of
indebtedness
of
the
corporation,
and
that
liabilities
for
guarantees
shall
be
shared
proportionately
and
each
shareholder
will
indemnify
the
others
for
his
or
her
share
of
the
amount
guaranteed.
Borrowing
from
Shareholders
If
the
shareholders
intend
that
they
may
elect
or
be
obligated
to
advance
funds
to
the
corporation,
the
USA
should
specify
the
circumstances
in
which
the
corporation
may
borrow,
how
the
decision

5.
5
is
made,
and
whether
there
is
a
maximum
amount
that
may
be
demanded
from
shareholders.
Shareholders
should
turn
their
minds
to
whether
contributions
are
capped
in
proportion
to
their
shareholdings.
Where
a
shareholder
is
obliged
to
advance
funds,
a
provision
for
failure
to
do
so
should
be
included.
Indemnification
and
Discharge
of
Guarantees
Where
a
shareholder
has
disposed
of
all
of
his
or
her
investment
in
compliance
with
the
USA,
it
may
be
appropriate
to
have
the
corporation
and
the
other
shareholders
use
their
best/reasonable
efforts
to
have
any
guarantee
or
pledge
issued
or
granted
by
the
shareholder
discharged
or
cancelled,
and
to
indemnify
the
departing
shareholder
for
liabilities
arising
with
respect
to
such
a
guarantee
or
pledge
subsequent
to
his
or
her
departure.
Pre-­‐emptive
Rights
A
preemptive
right
is
the
right
of
existing
shareholders
to
participate
on
a
future
equity
financing.
Usually
such
participation
will
be
on
a
proportionate
basis
but
may
allow
a
"pickup"
right
for
an
existing
shareholder
to
increase
his
or
her
holdings
for
that
portion
for
which
other
existing
shareholders
do
not
subscribe.
This
right
allows
existing
shareholders
to
participate
in
new
offerings,
such
that
they
are
not
diluted,
and
approve
new
or
replacement
partners
to
the
business.
Consideration
should
be
given
to
strategic
investors,
employee
option
plans
and
other
issuances
of
equity
that
may
be
appropriate
to
exclude
from
the
preemptive
right.
RESTRICTIONS
ON
TRANSFER/RIGHT
OF
FIRST
REFUSAL
General
Restrictions
on
Transfer
As
a
general
rule,
a
USA
will
provide
that
a
shareholder
may
not
dispose
of
or
use
his
or
her
shares
as
security
for
debts
without
meeting
the
requirements
set
out
in
the
USA,
such
as
prior
written
consent
of
the
other
shareholders
and
often
approval
by
the
board
of
directors.
Right
of
First
Refusal
or
"ROFR"
A
ROFR
requires
that
a
selling
shareholder
who
intends
to
sell
his
or
her
shares
to
a
third
party
purchaser
give
the
remaining
shareholders
the
opportunity
to
first
match
the
offer
from
the
third
party
purchaser.
If
the
remaining
shareholders
purchase
on
the
same
terms
as
offered,
the
third
party
purchaser
cannot
purchase
the
subject
shares
and
instead
the
remaining
shareholders
will.
If
the
remaining
shareholders
do
not
purchase
the
subject
shares,
the
selling
shareholder
is
free
to
sell
them
to
the
third
party
purchaser,
sometimes
with
the
caveat
that
it
is
not
a
competitor
of
the
business.
A
ROFR
can
take
different
forms.
It
may
require
that
a
written
offer
be
in
hand
before
the
ROFR
will
apply
to
the
selling
shareholder,
or
instead
require
that
any
shareholder
with
an
intention
to
sell
first
offer
his
or
her
shares
to
the
existing
shareholders.

6.
6
In
the
context
of
private
corporations
where
shares
already
cannot
be
sold
easily,
the
ability
to
sell
shares
can
be
made
even
more
difficult
by
the
inclusion
of
a
ROFR.
A
prospective
buyer
may
be
deterred
by
a
ROFR
and
may
perceive
his
or
her
investment
as
being
more
illiquid.
SHAREHOLDER
EXIT
RIGHTS
Drag
Along
(aka
Co-­‐Sale
Right)
Where
a
majority
shareholder
(or
several
shareholders
who
collectively
own
some
agreed
upon
higher
threshold
of
shares
in
excess
of
a
simple
majority)
decides
to
sell
shares
to
a
third
party
purchaser,
a
drag
along
clause
forces
the
remaining
shareholders
to
sell
their
shares
to
the
same
purchaser,
at
the
same
price
and
on
the
same
terms.
A
drag
along
can
also
compel
shareholders
to
approve
a
sale
of
all
or
substantially
all
of
the
assets
of
a
corporation
on
the
same
basis.
Tag
Along
(aka
Carry
Along
or
Piggy
Back)
Where
a
shareholder
agrees
to
sell
shares
to
a
third
party
purchaser,
a
tag
along
clause
allows
the
non-­‐selling
shareholders
to
sell
a
portion
of
their
shares
to
the
purchaser
at
the
same
price
and
on
the
same
terms
as
agreed
to
by
the
initiating
shareholder.
Compulsory
Buy-­‐Out
(aka
Roulette
or
Shotgun)
A
shareholder
may
make
a
compulsory
offer
to
the
other
shareholders
to
either
sell
all
of
his
or
her
shares
or
buy
all
of
the
other
shareholders'
shares
at
the
price
and
on
the
terms
set
out
in
the
offer.
This
tends
to
work
well
in
very
closely
held
corporations
where
the
shareholdings,
degree
of
participation
in
the
corporation
and
financial
position
of
the
shareholders
are
more
or
less
equal.
One
shareholder
may
be
at
an
advantage
where
he
or
she
has
a
much
better
ability
to
finance
the
share
purchase,
or
operate
the
business,
than
another
shareholder.
The
ideal
situation
is
where
there
are
only
two
equal
shareholders;
as
the
number
of
shareholders
increases,
this
provision
tends
not
to
work
as
the
mechanics
become
overly
complicated.
The
shareholders
to
whom
the
offer
is
made
have
the
option
of
buying
(pro
rata)
or
selling,
but
failure
to
give
notice
of
the
election
within
the
specified
time
period
is
normally
deemed
to
be
an
acceptance
of
the
offer
to
sell.
It
is
necessary
to
include
very
clear
provisions
regarding
completion
of
the
sale
(including
where,
when,
and
how).
Notice
requirements
and
limitation
periods
are
as
set
out
in
the
USA.
Consider
including
a
set-­‐
off
where
the
vendor
is
indebted
to
the
corporation
or
the
other
shareholder(s).

7.
7
Put
Right
A
put
right
is
the
ability
of
a
shareholder
to
require
other
shareholders,
a
specific
shareholder
or
the
corporation
to
purchase
his
or
her
shares
at
an
agreed
upon
price
and
usually
after
an
agreed
upon
time.
In
most
closely-­‐held
corporations,
a
put
right
will
not
usually
be
included.
They
may
be
desired
by
certain
investors
who
wish
to
have
the
ability
to
have
the
corporation
repurchase
shares
held
by
the
investor
at
a
certain
time
and
at
a
certain
price.
OTHER
INVOLUNTARY
SHAREHOLDER
EXITS
Call
Rights
A
call
right
is
the
ability
of
the
corporation
to
require
all
or
certain
specific
shareholders
to
sell
his
or
her
shares
at
an
agreed
upon
price.
Call
rights
are
very
common
in
circumstances
where
a
shareholder
no
longer
continues
to
be
actively
involved
in
the
corporation,
whether
due
to
resignation
or
termination
with
or
without
cause.
For
certain
shareholders,
the
call
right
in
a
situation
of
a
termination
without
cause
needs
to
be
considered
against
the
rights
of
a
shareholder
who
may
have
specific
entitlements
under
an
employment
contract.
In
some
but
not
all
circumstances
it
will
be
appropriate
to
include
default
provisions
in
the
event
that
a
shareholder
breaches
the
terms
of
the
USA.
In
very
closely
held
corporations
(e.g.
two
shareholders),
it
is
more
typical
to
include
a
shotgun
provision
instead
of
default
provisions.
Sale
on
death,
disability,
insolvency
or
marital
breakdown
of
a
shareholder
A
USA
could
set
out
what
will
happen
when
a
shareholder
dies,
or
becomes
disabled,
insolvent
or
divorced.
This
avoids
unintended
transfers
of
shares
to
other
parties
that
may
otherwise
take
place
upon
the
occurrence
of
these
events.
Insurance
planning
should
be
considered
at
an
earlier
stage
when
life
insurance
policies
to
be
held
by
the
corporation
may
be
more
favourably
priced.
If
the
corporation
obtains
policies
of
insurance
on
all
or
certain
shareholders
(depending
on
how
closely
held
and
how
actively
involved
the
shareholders
may
be
in
the
business),
the
USA
may
provide
that
shares
of
the
deceased
shareholder
are
purchased
by
the
corporation
or
the
other
shareholders
(depending
on
which
results
in
more
favourable
tax
treatment)
using
the
insurance
proceeds.
Where
there
is
insolvency,
or
marital
breakdown
and
the
shares
are
not
subject
to
a
matrimonial
contract,
a
contractual
right
may
be
included
in
the
USA
allowing
the
shares
of
the
insolvent
or
divorced
shareholder
to
be
purchased
by
the
corporation
or
other

8.
8
shareholders.
Sometimes
the
corporation
will
have
the
first
right
to
purchase,
then
the
remaining
shareholders,
or
sometimes
vice
versa
(except
in
the
case
of
death).
Tax
consequences
differ.
In
all
cases,
provisions
regarding
completion
of
the
sale
need
to
be
included,
including
price,
timing
and
payment
terms,
on
the
assumption
that
the
corporation
will
not
have
the
cash
to
necessarily
complete
an
all
cash
purchase
up
front.
Any
security
contemplated
for
the
unpaid
purchase
price
should
be
set
out
in
the
USA.
CONFLICT
RESOLUTION
Arbitration
In
the
event
of
a
conflict
arising
between
the
shareholders,
this
clause
requires
the
conflict
to
go
through
the
process
of
arbitration
as
opposed
to
a
trial
before
a
court.
Arbitration
is
often
seen
as
advantageous
over
going
court
because
it
can
be
less
costly,
faster
and
allows
parties
to
choose
the
person
deciding
the
issues.