Any company with more than one shareholder should give some thought to whether or not they should implement a unanimous shareholders’ agreement (a “USA”). USAs give shareholders the flexibility to set out exactly how a corporation will be structured, how decisions will be made and how disputes will be resolved, among many other things. Generally speaking, they allow shareholders to carefully control various aspects of the corporation and allow a great deal of flexibility in doing so. The following are some key ways in which a USA can help shareholders maintain control over their companies:
- Control over the Business. One of the key aspects that a USA will address is how a business is structured. USAs allow shareholders to agree ahead of time on how they want the board of directors to be structured. One common example is where the founder of a small company wants to issue shares to her partners, but wants to maintain a seat on the board of directors. This can be explicitly set out in the USA to allow the founder to bring in new partners and shareholders, while ensuring she maintains a seat at the table.
- Control over Business Decisions. Another important provision to consider in a USA is whether (and how) shareholders will maintain control over certain decisions that are made by the Corporation. For instance, many USAs will list a set of key decisions that may not be taken by the board without the approval of a certain threshold of shareholders, or in some cases, certain named shareholders (such as the founder). For example, the USA could stipulate that new shares may not be issued without the approval of shareholders holding a majority of the company’s shares, and if desirable can explicitly give any one or more individuals (by name) veto rights over any such decision.
Another common way that shareholders can maintain a certain level of control over business decisions is through the use of drag-along rights. These rights prevent minority shareholders from resisting or dissenting to the sale of the company as long as a certain portion of shareholders agrees to sell.
- Control over Shares. There are many reasons why a shareholder may exit a company. Without proper restrictions in place, this may lead to the remaining shareholders being forced into business with someone they do not know, trust, or want to work with. A property structured USA will ensure that shares can only be sold to third-parties where the other shareholders either agree, or have been given the opportunity to buy the shares themselves.
- Control over Disputes. One of the most important aspects of a USA is that it allows to determine how disputes among them, or between them and the company will be resolved. Whether it be by negotiation, mediation, arbitration, a court of law, or some combination of these. Furthermore, shareholders can ensure that any legal action in respect of the Shareholders’ Agreement is brought within a certain jurisdiction (i.e. Ontario), which is particularly important where a company does business in more than one province or country.
These are just a small sample of the provisions that shareholders can include in a USA to maintain control and flexibility within their company. Ultimately, the USA is a very useful and flexible tool that, if used properly, can allow a company to run efficiently and effectively both in the short term, and well into the future.
This article is for informational purposes only and does not constitute legal advice. If you wish to discuss your issue with a lawyer, contact Dustin today. 416-621-1457 ext.312, [email protected]