Governance at private companies can be simple. But when
stakeholder interests aren't aligned, a company begins to slide
into the realm of independent directors and shareholder
Private companies often require very little governance. But as a
business begins to emerge from obscurity and attract an increasing
number of investors, it may become desirable to introduce new
measures. These are represented by an agreement signed by
shareholders called a "unanimous shareholders agreement"
Aside from determining to some extent how the company will be
managed, USAs typically contain provisions affecting
shareholders' ability to sell or retain stock. Firstright
provisions, for example, give some or all existing shareholders the
opportunity to buy any stock proposed to be sold, whether prior to
its offering (right of first offer) or prior to the completion of a
sale (right of first refusal). Tag-along rights allow some or all
shareholders to participate (usually in proportion) with
shareholders who are permitted to sell and have agreed to do
Complex negotiations are common in USAs, given that some
investors want to restrict founder liquidity, either with a view to
maintaining entrepreneur "hunger," or on the basis that
no one should enjoy a superior liquidity right. Founders, however,
can often argue on the basis of being early investors who have
taken the company to a new level and who will continue to maintain
a meaningful stake. Sometimes founders negotiate for the right to
sell some percentage of their holding (typically 25 to 35 per cent)
free of tag-along, first-refusal or other significant
The USA also typically provides that a total sale of the
business can be approved by some agreed percentage of the
shareholders. The threshold is often set so that no shareholder or
class of shareholders can determine the matter. (A two-thirds
approval requirement, after all, provides little protection if the
founder owns 75 per cent.) So it may be the case that 75 per cent
of all shareholders, including 51 per cent of the class of
preferred shareholders, can commit to a sale of the entire
Similar control issues arise with respect to amendment or
termination of the agreement. USAs usually terminate on completion
of a liquidity event (such as an IPO or merger), or when one
shareholder buys all of the shares, or when all of the shareholders
simply agree to a termination.
Although a USA is by definition an agreement among all
shareholders, requiring unanimous consent to amend or terminate the
USA is unwise. While there is always the risk of a rogue
shareholder attempting to leverage a situation, the more realistic
risk is the difficulty of obtaining 100 per cent shareholder
approval in a timely manner. As a result, USAs often include
provisions allowing for amendment or termination by a suitable
majority. It is important that the amendment provisions in
particular be very clear about what the required majority is and
what sorts of amendments may be permitted.
Any of a great number of the terms of the USA may require
amendment, and it may even be, in the context of a later financing,
that the USA will need to be replaced entirely. As such, it's
better to provide a blanket right to amendment with the required
majority rather than constrain the right in any way. Any
limitations may create difficulty for a law firm required to
provide an opinion, or for the other side of a transaction that is
being asked to rely on the amendment power. The oppression remedy
is available for any shareholder inappropriately addressed by the
use of the amendment power.
A well crafted USA can be an important element in the evolution
of private-company governance, but there is no one-size-fits-all
solution. Founders and early-stage investors should be sure to get
advice from counsel experienced in what are often complicated
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.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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