On this page
Why owners sign one
A shareholders’ agreement is a contract among the owners of a company, and usually the company itself, about how they will own it together. The articles and by-laws set the company’s legal framework; the agreement settles the questions the articles do not answer, such as who can buy in, how a departing owner is bought out and what happens on a death. The shareholders’ agreements section of our corporate law page places it alongside the company’s other documents.
Ontario’s Business Corporations Act (the OBCA) recognizes two kinds. Section 108(1) allows a written agreement between two or more shareholders about how their shares will be voted. Section 108(2) allows a written agreement among all the shareholders that restricts the directors’ powers, which is a unanimous shareholder agreement. Most private company agreements do more than either: they also deal with transfers, buyouts, decisions and deadlock, as contract terms the owners choose. It is far easier to sign one while everyone still agrees, and many owners do it when the company is set up or when a second owner joins.
What the agreement settles
- Who can buy shares, and at what price.
- How a departing owner is bought out, and how the price is set (see buy-sell and shotgun clauses).
- What happens to an owner’s shares on death or disability, often funded by insurance.
- Rights of first refusal, and drag-along and tag-along rights on a sale.
- Which major decisions need everyone’s approval.
- What happens if the owners are deadlocked.
- Non-competition and non-solicitation after an owner leaves (see whether non-compete clauses are enforceable).
How an agreement is put in place, step by step
- Agree the business points first. Who decides what, how shares are valued, what happens on each exit event. The legal drafting follows the owners’ decisions, not the other way round.
- Bring in the accountant and insurance advisor. Buyout funding, share classes and who buys on a death all have tax and insurance consequences.
- Check it against the articles. Private company articles usually restrict share transfers already; Ontario’s standard incorporation text, for example, requires the approval of the directors or a majority of the shareholders. The agreement should work with those restrictions, and section 5(4) of the OBCA lets a unanimous shareholder agreement require more votes than the Act does.
- Each owner gets independent advice. The owners’ interests can differ, which is why independent advice before signing is encouraged.
- Sign, and record it. Section 140(1)(a) requires a copy of any unanimous shareholder agreement known to the directors to be kept with the articles and by-laws, and the minute book is the natural home for any agreement. What else belongs there is set out in what goes in an Ontario corporation’s minute book.
- Keep it current. A new investor, a new class of shares or a change in the owners’ family or estate plans is a reason to review it.
| Clause | What it usually does | Statutory point to work with |
|---|---|---|
| Voting agreement | Sets how owners vote, for example to elect each other as directors | OBCA s. 108(1) |
| Restrictions on directors | Moves major decisions to the shareholders | OBCA s. 108(2), (5): shareholders take on directors’ duties to that extent |
| Pre-emptive rights | Lets existing owners buy new shares first | OBCA s. 26, if in the articles or a unanimous shareholder agreement |
| Transfer restrictions and first refusal | Controls who can buy in | Restrictions in the articles; s. 108(4), (8) bind transferees under a unanimous agreement |
| Buyout on death or incapacity | Requires or allows a purchase of the shares | OBCA s. 67(2): a corporation that restricts share transfers must treat the estate trustee or attorney as the holder, on proper evidence |
| Company buyback | The company buys the shares itself | Solvency tests in OBCA ss. 30(2), 31(3), 32(2) |
| Non-competition | Limits competition after an owner leaves | Employment Standards Act, 2000, s. 67.2 for employer and employee agreements |
Unanimous shareholder agreements
Under Ontario’s Business Corporations Act, an agreement signed by every shareholder can generally also restrict the powers of the directors. That is called a unanimous shareholder agreement.
It has consequences an ordinary agreement does not. Section 108(5) gives the shareholders the rights, duties and liabilities of directors to the extent the agreement restricts the directors’ powers, and section 134(2) requires directors and officers to comply with it. Anyone who later receives or buys shares is deemed to be a party under sections 108(4), (7) and (8), with a limited right to object if they had no notice of it. A sole shareholder can create one by written declaration under section 108(3). We explain each of these rules in what is a unanimous shareholder agreement in Ontario.
New agreements and updates
We draft agreements for new companies and review or update older ones, often when a new investor joins or the share structure changes, including companies with more than one class of shares.
Your shareholders’ agreement and your will should say the same thing about your shares.
Read more: What a shareholders’ agreement should cover.
What changes the answer
Two equal owners
With a 50/50 split, every decision can deadlock. Agreements for equal owners usually need a way out, such as a shotgun clause or another buyout mechanism, explained in buy-sell and shotgun clauses.
A majority and a minority
A minority owner usually wants a say on the largest decisions and the right to join a sale (tag-along). A majority owner usually wants to be able to deliver the whole company to a buyer (drag-along). The agreement balances the two.
A new investor
New shares are issued by the directors under section 23 of the OBCA, subject to any pre-emptive rights under section 26. The steps are in how shares are issued in an Ontario corporation, and the investor should sign on to the agreement when the shares are issued. If the investor will hold 25 percent or more of the votes or value, the company must also record them in its register of individuals with significant control within 15 days of becoming aware of it (OBCA s. 140.2(4)).
Owners who hold through holding companies
If the shareholders are holding companies, they are the parties, and the agreement usually binds the people behind them too, as described in what is a holding company. A change of ownership in a holding company may need to be treated like a sale of shares.
Death and incapacity
The agreement often decides what happens to your shares on death more directly than your will, so the two must match. Our page on estate planning for business owners explains how. Some owners also use a secondary will for private company shares. If you lose capacity, the person you name in a continuing power of attorney for property may have to act under a disability buyout.
Directors’ duties do not disappear
Owners who are also directors still owe the duties in section 134 of the OBCA, whatever the agreement says, except to the extent a unanimous shareholder agreement moves powers to the shareholders. Those duties are set out in directors’ duties under Ontario’s OBCA.
Example
For example, imagine three owners of a Vaughan manufacturing company: Paolo with 50 percent, and Rita and Sam with 25 percent each. Their agreement requires all three to approve borrowing above an agreed limit, issuing new shares and selling the business, which makes it a unanimous shareholder agreement for those decisions. It gives the existing owners a right of first refusal on any transfer, lets Paolo drag the others into a sale approved by owners holding 75 percent, and lets Rita and Sam tag along on any sale by Paolo.
On a death, the company must buy the shares from the estate at the value the owners update each year, funded by insurance the company owns, and only if it meets the solvency test in section 30(2) of the OBCA. Each owner signs a will and power of attorney that match the agreement. When an investor later buys new shares, she signs a joinder and, under section 108(7), would have been bound by the agreement in any event.
Common mistakes
- Waiting until there is a problem. It is far harder to agree terms once owners disagree.
- A stale valuation. An agreed value nobody updates produces the wrong price on death or exit.
- Insurance that does not match the buyout. The policies and the agreement should describe the same arrangement.
- Moving powers without explaining the liability. Under a unanimous shareholder agreement, the shareholders take on directors’ duties for those decisions.
- A will that contradicts the agreement. If the agreement requires a sale, the family receives the price, not the shares.
- New owners never sign on. A joinder keeps the agreement clearly binding on everyone.
What to bring
Your articles of incorporation, the current share register, and a list of the questions you and your partners have not settled yet.
What to do this week
- Find your articles and any existing agreement, and note the date it was signed.
- List the owners, their percentages and the share classes they hold.
- Write down how each owner would want a death, disability, retirement or departure handled.
- Check whether the agreed share value has been updated recently.
- Ask your accountant and insurance advisor about buyout funding.
- Compare the agreement with each owner’s will and power of attorney.
- If you want an agreement drafted or reviewed, a first consultation takes 30 minutes, by video or in person, and you can request one here.
Frequently asked questions
We already have an agreement. Should we review it?
Yes, if the owners, the share structure or the business has changed since it was signed, or if it doesn’t deal with death, disability or valuation.
Can one lawyer act for all the shareholders?
Often the company retains the lawyer, and each owner is encouraged to get independent advice before signing. We will explain how it works for your group.
Is a shareholders’ agreement required by law?
No. The OBCA allows owners to make one, and gives special effect to a unanimous shareholder agreement, but it does not require one.
Does the agreement bind someone who buys shares later?
A unanimous shareholder agreement does: sections 108(4), (7) and (8) of the OBCA deem new and buying shareholders to be parties. For other agreements, a new owner should sign a joinder.
What is the difference between drag-along and tag-along rights?
A drag-along lets owners who approve a sale require the others to sell on the same terms. A tag-along lets minority owners join a sale by the majority on the same terms.
Can the company buy back an owner’s shares?
Yes, subject to its articles, if it meets the solvency tests in sections 30 to 32 of the OBCA at the time of payment.
Sources
- Business Corporations Act, R.S.O. 1990, c. B.16, ss. 1.1, 5(4), 23, 26, 30 to 32, 67(2), 108, 134, 140(1)(a) and 140.2(4)
- Ontario: Notice, Incorporating a Business Corporation (predefined share transfer restrictions)
- Employment Standards Act, 2000, S.O. 2000, c. 41, s. 67.2
Questions clients ask about shareholders’ agreements
Each of these answers one question in more depth, with the Ontario law behind it.
- Buy-sell and shotgun clauses in Ontario shareholders’ agreements What each clause does, how a shotgun runs, and the rules when the company buys.
- What is a unanimous shareholder agreement in Ontario? How it differs from an ordinary agreement, what it shifts to shareholders, and who it binds.
This page is general information about Ontario law, not legal advice for your situation.