Canada: Practical Considerations For Entering Into A Shareholders' Agreement

Last Updated: April 26 2018
Article by Carlye Bellavia and Rory Cattanach

Notwithstanding the size or stage of your business, if your company has more than one shareholder, it is wise to consider entering into a shareholders' agreement. A shareholders' agreement is a contract between some or all of the shareholders of a company, and in some instances, the company itself. The contract governs the relationship between the parties and can control how the business and affairs of the company are managed. While there is no legal requirement for shareholders to enter into this type of agreement, there are a number of benefits gained from having a shareholders' agreement in place. In general, a well-drafted and considered shareholders' agreement anticipates reasonably likely future events and provides for methods of dealing with them, which can help avoid or resolve future disputes among shareholders, and ultimately save time, money and the stresses associated with conflict resolution. However, shareholders' agreements can also result in burdensome conditions, making it more difficult to effect decisions and run a business. For example, a shareholders' agreement that requires unanimous consent for certain corporate actions, or provides certain shareholders with veto rights over certain company activities, can result in deadlocks and lost business opportunities.

The following is a high-level summary of the material covered in Chapter 4 Shareholders' Agreements of a new book Startup Law 101: A Practical Guide edited by Catherine Lovrics, a partner of Bereskin & Parr LLP. Chapter 4 of Startup Law 101: A Practical Guide was contributed by Wildeboer Dellelce LLP lawyers Rory Cattanach and Carlye Bellavia. Startup Law 101: A Practical Guide was published by LexisNexis Canada.

What is the Purpose of a Shareholders' Agreement?

Shareholders' agreements can be used for a variety of purposes depending on the parties involved. For example, a shareholders' agreement can address procedural matters pertaining to a company, such as the frequency of board meetings and how a meeting is called. Alternatively, a shareholders' agreement can be used to deal more substantively with shareholder voting rights. In this type of agreement, often referred to as a voting or pooling agreement, the parties agree to vote their shares in a particular manner with respect to certain items of business or the election of directors.

Shareholders' agreements can also confer rights, restrictions and obligations on shareholders. Examples of shareholder rights and restrictions include: (i) how shareholders can transfer, dispose of or encumber their shares; (ii) a priority right to purchase newly issued shares from the company; (iii) rights over the approval of the sale of the company or its assets; (iv) a right to receive additional information about the company beyond the regulated corporate disclosure requirements; (v) financing obligations; and (vi) non-competition and non-solicitation clauses prohibiting shareholders from competing with or taking clients from the company.

In addition to governing the relationship and permitted and prohibited activities of shareholders and the company, certain types of shareholders' agreements are used to restrict the powers of the board of directors and transfer some or all of these powers from the directors to the shareholders.

Types of Shareholders' Agreements

There are two main types of shareholders' agreements:

(i) a general shareholders' agreement is a contract between two or more shareholders and
is treated as a traditional commercial contract. This type of agreement is subject to a
company's constating documents and should be carefully drafted to be consistent with
its articles and by-laws as well as provisions of applicable corporate statutes; and

(ii) a unanimous shareholders' agreement (a "USA") is a contract involving and signed by all
of the shareholders of a company. A USA can address matters that are typically dealt
with in a general shareholders' agreement. Additionally, the Business Corporations Act
(Ontario) ("OBCA") and the Canada Business Corporations Act ("CBCA") provide that a
USA can restrict the powers of the board of directors to manage or supervise the
management of a company. Under these conditions, shareholders inherit the rights,
powers and duties, as well as the liabilities, of the directors.

Considerations for Drafting a Shareholders' Agreement

In Ontario, shareholders' agreements are regulated by ordinary common law principles of contract law, as well as by the OBCAor the CBCA, as applicable. The OBCA and CBCA permit certain shareholders' agreements to override a number of statutory provisions. As such, in addition to consulting a company's articles and by-laws, it is important to consider the effect of applicable corporate statutes when drafting a shareholders' agreement.

Although each shareholders' agreement will be tailored for the type of business and circumstances of the company, there are a number of standard provisions that are commonly included in most shareholders' agreements. A shareholders' agreement is often used to control the transfer of shares of the company by its shareholders. For example, if a company is privately held, share transfer restrictions can be put in place to ensure that any one shareholder does not transfer its shares to an unknown or unwanted third party without prior approval of the other shareholders or the board of directors. A shareholders' agreement can include a general prohibition on transferring shares, or alternatively, can outline limited scenarios where transfers are permitted. In the case of a permitted transfer, the transferee should be required to agree to be bound by the shareholders' agreement.

There are also a number of provisions in a shareholders' agreement that can be used to control share issuances and dispositions, including pre-emptive rights and rights of first refusal/first offer. A pre-emptive right provision gives existing shareholders the right to purchase any new securities that a company proposes to issue; this gives existing shareholders the opportunity to prevent their ownership from being diluted when new shares are issued. Similarly, a right of first refusal clause gives shareholders a right to purchase shares from another existing shareholder that wishes to dispose of its shares to a third party. Before the selling shareholder can dispose of its shares, it must first offer to sell such shares to the other shareholders of the company, who will have the right to buy their pro rata portion of the shares on the same terms and conditions as the selling shareholder received from the third party for a limited time period. A shotgun clause can be used to facilitate the exit of a shareholder from the company by allowing a shareholder to either sell its shares to or acquire shares from one or more existing shareholders on identical terms.

Tag-along rights and drag-along rights are especially important for start-ups with upside potential. Tag-along rights provide minority shareholders with greater liquidity and protection if one or more shareholders are selling their shares, while drag-along rights prevent a minority shareholder from blocking the sale of the company that is supported by the majority of shareholders.

Other provisions commonly included in shareholders' agreements (i) set out voting thresholds, in excess of those prescribed by corporate statutes, or require special shareholder approval in order for certain corporate actions to be undertaken; (ii) dictate the approvals required for permitted debt arrangements; (iii) deal with events pertaining to the death, disability, loss of capacity or divorce of an existing shareholder; (iv) provide for one or more mechanisms for dispute resolution; and (v) confirm that each party to the agreement has obtained independent legal advice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Alexander Holburn Beaudin + Lang LLP
Alexander Holburn Beaudin + Lang LLP
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Alexander Holburn Beaudin + Lang LLP
Alexander Holburn Beaudin + Lang LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions