The Shareholder Agreement Explained
Running a business with more than one shareholder creates opportunities, but it also creates risk. When shareholders disagree over how decisions are made, how profits are distributed, or what happens when one of them wants to leave, the consequences can be serious and expensive. A shareholder agreement addresses all of these questions in advance, on terms the shareholders themselves choose, before a dispute forces the issue.
This article explains what a shareholder agreement is, the difference between a general shareholder agreement and a unanimous shareholder agreement, the key provisions every agreement should address, when you need one, and what happens if you operate without one. For shareholders already in a dispute, see our guide to shareholder disputes in Ontario.
Without a shareholder agreement, shareholders are governed entirely by the default rules of the Ontario Business Corporations Act or the Canada Business Corporations Act, which rarely reflect the specific arrangements shareholders have made or the outcomes they actually want when disagreements arise.
What is a shareholder agreement?
A shareholder agreement is a contract between the shareholders of a corporation that sets out how they will work together, how decisions will be made, how shares can be transferred, and what happens when the relationship breaks down. It operates alongside the corporation's articles of incorporation and bylaws, filling in the significant gaps those documents leave.
In Ontario, shareholder agreements are governed by the Ontario Business Corporations Act (OBCA) if the corporation is provincially incorporated, or by the Canada Business Corporations Act (CBCA) if it is federally incorporated. Both statutes permit shareholders to customize governance arrangements through written agreements that supplement or modify the default statutory rules.
A well-drafted shareholder agreement does not just prevent disputes. It determines how disputes are resolved when they inevitably arise, what each shareholder can recover if they want to exit, and how the business continues when circumstances change. It is the document that turns a business partnership into a defined legal arrangement with predictable outcomes.
General shareholder agreement vs unanimous shareholder agreement
Ontario recognizes two main types of shareholder agreements, each with distinct legal characteristics and appropriate uses.
General shareholder agreement
- Binding on shareholders who are party to it
- Does not require all shareholders to sign
- Cannot restrict board powers under the OBCA
- Governs shareholder relationships and share transfers
- New shareholders need not be bound automatically
- Most common in closely held private corporations
Unanimous shareholder agreement (USA)
- Requires all shareholders to sign
- Can restrict or transfer powers from directors to shareholders
- Shareholders who assume director powers take on director duties
- New shareholders are automatically bound on acquiring shares
- Has special legal status under the OBCA and CBCA
- Appropriate where shareholders want direct control over management
The choice between a general shareholder agreement and a unanimous shareholder agreement depends on the corporation's size, ownership structure, and how much control the shareholders want to retain over management decisions. For most small and medium-sized private corporations in Ontario, a well-drafted general shareholder agreement provides sufficient protection. A USA is most useful where the shareholders are also the active managers of the business and want to formalize that arrangement.
Key provisions every shareholder agreement should address
The value of a shareholder agreement depends entirely on what it covers. Vague or incomplete agreements create exactly the kind of ambiguity that leads to disputes. The following provisions are the ones that matter most.
Share transfer restrictions
Without transfer restrictions, a shareholder can sell their shares to anyone, including a competitor or someone the other shareholders would never have chosen as a co-owner. Transfer restrictions, including rights of first refusal and consent requirements, give the remaining shareholders control over who can become a shareholder.
Buy-sell and shotgun clauses
A buy-sell clause allows one shareholder to trigger a forced exit by naming a price at which the other must either buy or sell. It is the most effective mechanism for resolving a deadlocked shareholder relationship without litigation. Without one, a shareholder who wants to exit has no reliable contractual mechanism to force a resolution. See our detailed guide on share buyback disputes for what happens without these provisions.
Decision-making and voting
The agreement should specify which decisions require unanimous consent, which require a supermajority, and which can be made by the board. Without this clarity, majority shareholders can override minority shareholders on significant decisions, and minority shareholders may be able to deadlock the corporation on routine matters.
Dividend and distribution policy
Disagreements over whether to distribute profits or reinvest them are among the most common causes of shareholder conflict. A clear distribution policy reduces this risk. The agreement should also address what happens if the corporation cannot pay agreed dividends, and whether shareholder-employees are entitled to compensation through salary rather than dividends.
Non-competition and non-solicitation
When a shareholder exits the business, the remaining shareholders need protection against that person competing directly or soliciting clients and employees. These provisions must be carefully drafted to be enforceable: courts will not enforce non-competition clauses that are broader than reasonably necessary to protect the corporation's legitimate interests.
Dispute resolution
Requiring mediation or arbitration before court proceedings can significantly reduce the cost and time required to resolve a dispute. The agreement should specify the process, the applicable rules, and how costs are allocated. A well-drafted dispute resolution clause can prevent a manageable disagreement from escalating into years of litigation.
Death, disability, and departure
What happens if a shareholder dies, becomes permanently incapacitated, or is terminated as an employee? Without provisions addressing these events, the answer depends on the default statutory rules, which rarely produce the outcome the parties would have chosen. These triggering events should each have a defined response including valuation procedures and payment terms.
Information rights
Minority shareholders who are not involved in day-to-day management have a legitimate interest in receiving regular financial information about the corporation. An agreement that specifies what financial reports will be provided, at what frequency, and in what format prevents disputes about whether a shareholder is entitled to information they are being denied.
When you need a shareholder agreement
The short answer is: before you need it. Shareholder agreements are most effectively negotiated when all parties are aligned and the business is operating well. Attempting to negotiate one after a dispute has begun is significantly harder, more expensive, and less likely to produce a balanced result.
Operating without a shareholder agreement? Or facing a dispute under an existing one?
The absence of a shareholder agreement is one of the most common causes of expensive shareholder litigation in Ontario. If you are in a dispute now, see our guide to shareholder dispute remedies. If you want to get an agreement in place before a dispute arises, the time to act is now.
Call: 1-800-771-7882 Speak With a LawyerWhat happens without a shareholder agreement
Without a shareholder agreement, the corporation is governed by the applicable statute, its articles, and its bylaws. For most closely held private corporations, this means:
- No agreed exit mechanism: a shareholder who wants to leave has no contractual right to force a buyout and no agreed price or process for doing so
- No customized decision-making rules: majority shareholders can make most decisions without minority consent, and minority shareholders have limited ability to protect their interests
- No agreed dispute resolution process: disputes must be resolved through costly litigation using the statutory remedies, primarily the oppression remedy under the OBCA or CBCA
- No transfer restrictions: shares can be transferred to anyone the shareholder chooses, subject only to the statutory constraints
- No agreed valuation: when a buyout is eventually forced through litigation or negotiation, the parties must agree on or litigate valuation from scratch
The oppression remedy under section 248 of the OBCA provides some protection for minority shareholders, but it is a litigation remedy that requires court proceedings to access. It is expensive, slow, and uncertain compared to a well-drafted shareholders agreement that resolves the same issues contractually.
Shareholder agreements in British Columbia
BC corporations are governed by the Business Corporations Act (BCBCA) rather than the OBCA. The BCBCA recognizes shareholder agreements and unanimous shareholder agreements in the same way as the Ontario legislation, and the same general principles apply. The key structural provisions, share transfer restrictions, buy-sell mechanisms, decision-making rules, and dispute resolution procedures, are equally important in BC corporations.
BC's equivalent to the oppression remedy is found in section 227 of the BCBCA and is similarly broad in scope. For BC shareholders, a well-drafted shareholders agreement is equally important and serves the same function as in Ontario.
Need a shareholder agreement drafted, reviewed, or updated?
Achkar Law advises shareholders and businesses across Ontario and BC on shareholder agreement drafting, review, and dispute resolution. A properly drafted agreement is significantly less expensive than resolving a dispute without one.
Speak With a Shareholder Lawyer Or call us: 1-800-771-7882Practical takeaways
Frequently asked questions
What is a shareholder agreement in Ontario?
A shareholder agreement is a legally binding contract between the shareholders of a corporation that defines their rights, obligations, and the rules governing their relationship. It covers share transfers, decision-making, dividend policy, exit mechanisms, and dispute resolution. In Ontario, shareholder agreements operate alongside the Ontario Business Corporations Act or the Canada Business Corporations Act depending on where the corporation is incorporated.
Is a shareholder agreement legally required in Ontario?
No. A shareholder agreement is not legally required in Ontario. However, operating without one leaves shareholders governed entirely by the default statutory rules, which rarely reflect the specific arrangements shareholders have made. The absence of a shareholder agreement is one of the most common causes of costly shareholder disputes in closely held corporations.
What is a unanimous shareholder agreement?
A unanimous shareholder agreement is a specific type of shareholder agreement that requires the consent of all shareholders and can restrict or transfer powers otherwise exercisable by the board of directors. Under the OBCA and CBCA, a USA has special legal status: shareholders who assume director powers under a USA take on the same duties and liabilities as directors, and new shareholders are automatically bound by the USA on acquiring shares.
What is a buy-sell clause in a shareholder agreement?
A buy-sell clause, also called a shotgun clause, allows one shareholder to trigger a forced buyout by naming a price per share. The other shareholder must either buy the triggering shareholder's shares at that price or sell their own shares at the same price. It is the most effective contractual mechanism for resolving a deadlocked shareholder relationship without litigation, and its absence is a significant gap in any shareholders agreement.
What happens if there is no shareholder agreement?
Without a shareholder agreement, the corporation is governed by the applicable statute, its articles, and its bylaws. There are no agreed exit mechanisms, no customized decision-making rules, and no agreed dispute resolution process. Disputes must be resolved through the statutory remedies, primarily the oppression remedy, which requires court proceedings and is expensive, slow, and uncertain compared to well-drafted contractual provisions.
When should a shareholder agreement be put in place?
The best time is before a dispute arises, ideally at the time the corporation is formed or when a new shareholder joins. Shareholders who are getting along are most likely to negotiate a balanced and comprehensive agreement. Attempting to negotiate one after a dispute has begun is significantly more difficult. Existing agreements should also be reviewed whenever the ownership structure, business, or applicable law changes materially.