What is a Unanimous Shareholder Agreement?
What is a Unanimous Shareholder Agreement?
A Unanimous Shareholder Agreement (“USA”) is an agreement that binds all shareholders of a corporation. This includes future shareholders. It is a recognized agreement as set out in the Alberta Business Corporations Act (“ABCA”). A USA can be tailored to your specific needs. The USA sets out in a written contract the various procedures and restrictions on how the shareholders manage their rights, liabilities, shares and affairs as between themselves, further, a USA can place restrictions on the powers of the directors in managing the operations of the corporation.
Why Does My Corporation Need a Unanimous Shareholder Agreement?
Most corporations with more than 1 shareholder should have a USA. The terms of the USA will vary from corporation to corporation depending on each corporation’s specific goals and needs. USAs often function to help resolve and settle disagreements between shareholders by setting out the procedures to be followed if a shareholder dispute arises. Disputes can occur unexpectedly for any number of reasons, such as illness, disability, bankruptcy, divorce and death. For example, on divorce, the ex-spouse may be entitled to a portion of the shares, which may trigger the buy-sell provisions of a USA. Similarly, in the case of death, the beneficiaries may inherit the shares which is usually something the corporation wants to avoid. If a shareholder becomes ill and unable to contribute, how should that be handled? A USA makes resolving these issues less costly and less time-draining.
Some other areas of concern addressed in a USA include corporate governance and management, election of directors, raising capital, shareholder’s loans, buy-sell rights, right of first refusal, shotgun provisions, non-competition provisions and other issues that the shareholders may wish to predetermine.
A USA may contain some of the following recommended clauses:
Raising Funds and Dealing with Debts – directions regarding under what circumstances and how much shareholders must contribute to growth or debt;
Requirements for Board meetings and how the Board is to be governed – Bylaws generally cover these areas, but if it is in the USA, then you have a more permanent structure that must be followed and cannot easily be changed by future boards;
How the Board is made up and how decisions are delegated to which board members – the board decisions guide the corporation; however, the shareholders may want to retain a little, or a lot, of control over the board elections and decision-making ;
Agreements for shareholders who are employees – it is an additional level of protection for intellectual property, non-compete, solicitation of employees and clients;
Process for transferring shares – this prevents the shares from going to unwanted individuals, such as hostile competitors, ex-spouses, estate beneficiaries, or other individuals that may not be capable of contributing;
Valuation method for shares – it is important to have a pre-set formula for determining the value of shares when shares must be bought or sold or transferred;
Sale of shares (Buy-Sell clauses) – there are many ways to structure a buy-sell clause, several factors need to be considered;
Shotgun Clauses –are useful if one shareholder wants to either buy-out or sell-out shares;
Minority Shareholder rights – protect rights of minority shareholders;
Process governing Dividends – predetermine the circumstances that will trigger dividend payments, or that stipulate no dividends;
Corporate agreements with shareholders, directors and employees – these can include items such as benefits, life insurance, director compensation, expenses, etc.
Dispute resolution mechanisms – if there is a dispute, it is a powerful tool to set out the process for dispute resolution in advance;
How and When should I Obtain a Unanimous Shareholder Agreement for My Corporation?
A USA can be created at any time you believe your corporation is ready and may require a USA to clearly set out procedures between shareholders. Before you meet with a lawyer, I recommend that all other shareholders meet and write a list of potential issues and conditions they want covered in a USA. I can also help facilitate that meeting if there may be difficulties in reaching consensus. It is vital that all existing shareholders have input as they will sign and be bound by the USA.
There is a definite cost-benefit to having a USA in place before any issues arise. A USA will save the time and money of determining how to resolve the issue because the mechanisms and procedures for resolution will be determined in the USA. A USA allows you to focus more on running and growing your company rather than being distracted by events that arise and may put your business at risk.
We are here to assist you by taking care of the legal matters and to make sure you are prepared to allow your business to prosper from start-up to wind-up.