Are you a shareholder of a privately-held Saskatchewan corporation that has two or more shareholders? If so, you should consider whether a unanimous shareholder agreement is needed.
By way of background, most of the rights and responsibilities of corporations and their shareholders are prescribed by legislation or set out in the constating documents of the corporation. The key legislation which governs for-profit corporations in Saskatchewan is The Business Corporations Act (the “Act”). The constating documents of a corporation consist of its Articles of Incorporation (the “Articles”) and its Bylaws (“Bylaws”). Pursuant to the Act, Articles must be filed with the Director of Corporations in order to incorporate. The Articles describe the classes of shares of the Corporation and the rights and restrictions that apply to the ownership and transfer of shares. Once a corporation is formed, the Act authorizes the directors of a corporation to create the Bylaws. The Bylaws provide an additional set of rules which regulate the business and affairs of a corporation and its shareholders.
In addition to the guidelines set out in the Act, the Articles, and Bylaws, the shareholders of a corporation may agree to a further set of rules in a unanimous shareholder agreement. As its name suggests, a unanimous shareholder agreement (a “USA”) is an agreement between all of the shareholders of a corporation. The purpose of a USA is to supplement or modify the requirements and procedures set forth in the Act, the Articles, and Bylaws. Although a USA is not required by law, lawyers will frequently recommend a USA be in place for any corporation with two or more shareholders.
Reasons why you may wish to have a USA in place:
- Election of Directors - Pursuant to the Act, directors are elected at each AGM by a majority shareholder vote. Therefore, by default, a shareholder who owns a majority of the shares of a corporation will have the ability to elect the directors of the corporation and control the operations of the corporation. However, if the shareholders wish to depart from the procedure set out in the Act and grant a minority shareholder the right to elect one or more director, this right can be set forth in a unanimous shareholder agreement.
- Control over Decisions - Pursuant to the Act, directors of a corporation are entitled to direct the management of the business and affairs of the corporation. However, if a minority shareholder wishes to have input regarding a particular business decision, the shareholder could request to have this right be granted in a USA.
- Dispute Resolution - Where a corporation has only two shareholders and each shareholder holds an equal number of shares, the shareholders may, from time to time, have differing views on a particular issue. In such case, a deadlock would exist between the shareholders and, in the absence of a USA, the shareholders would be forced to seek guidance from the Courts to resolve this deadlock. Alternatively, the shareholders could set out a dispute resolution procedure in a USA and bypass the time and costs associated with going to Court. For example, the USA could specify the vote of one shareholder prevails in certain circumstances and the vote of the other prevails in other circumstances. Alternatively, the shareholders might agree in the USA that all disputes be resolved by good faith negations, failing which an arbitrator would decide the issue absolutely.
- Forced Sale of Shares - After a shareholder acquires shares in a corporation, there is no statutory mechanism to compel the shareholder to sell his or her shares. Therefore, if a shareholder becomes bankrupt (thereby subjecting his shares to seizure), commits a crime (thereby subjecting the corporation to public scrutiny), or separates from his spouse (thereby subjecting his shares to the division of family property), the other shareholders could not force the shareholder to sell his or her shares. For this reason, shareholders will often include a provision in a USA which compels a shareholder to sell his or her shares upon the occurrence of certain “terminating” or “withdrawing” events. In such case, the USA will generally also outline the process to be followed to determine the value of such shares.
- Revenue Distribution - In general, the directors of a corporation have the power to determine how the revenue of a corporation is to be distributed, which includes the determination of the timing and amount of any dividend payments. Alternatively, if the shareholders agree dividends are to be paid at a certain time and for a certain amount, this can be set out in a USA.
- Issuance of New Shares - Typically the directors of a corporation have the discretion to determine when the corporation issues shares, to whom they should be issued, and the value of the consideration paid for such shares. However, if the existing shareholders wish to have a “pre-emptive right” which enables them to acquire any newly issued shares before they are offered to a third party, this can be set out in a USA.
- Right of First Refusals - A USA will often provide the existing shareholders of a corporation with a right of first refusal (“ROFR”). A ROFR operates as follows: if a shareholder receives a bona fide offer to purchase his shares from a third party, the shareholder will be required to offer his shares to the existing shareholders of the corporation on the same terms and conditions offered by the third party before he is able to sell his shares to the third party. As a result, a ROFR is a mechanism that allows the existing shareholders of a corporation to limit or restrict the ownership of shares by new shareholders.
If you are a shareholder who would like to have a USA prepared, or if you would like any further information on this subject, please contact Peter Wilson.
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