Canada: The Importance Of A Shareholder Agreement For A Private Corporation

Last Updated: April 12 2013
Article by Jordan Morelli

It is not uncommon for entrepreneurs to overlook the importance of a shareholder agreement when establishing a new business. However, failure to overlook this critical agreement can cause considerable headache in the future. Simply put, a shareholder agreement is a contract to structure the relationship amongst the shareholders of a corporation. A well drafted shareholder agreement should define each party's expectations with clear rules that describe the relationship amongst the shareholders and outline how the business should be managed.

It is common for corporate statutes such as the Business Corporations Act (Ontario) (the "OBCA") or the CanadaBusiness Corporations Act (the "CBCA") to provide the directors of a corporation (rather than the shareholders) with the requisite power to manage the business of the corporation. This situation can be reversed through the use of a unanimous shareholder agreement which restricts the power of the directors to manage the corporation and instead transfers the authority to the shareholders. Both the OBCA and the CBCA provide that where a unanimous shareholder agreement exists, a shareholder who is a party has all the rights, powers, duties and liabilities of the directors to the extent that the agreement restricts the powers of the directors to manage the business of the corporation. In contrast, a shareholder agreement may be entered into among all shareholders without constituting a unanimous shareholder agreement if the agreement does not restrict the powers of the directors to manage the business of the corporation.  

Regardless of which type of shareholder agreement is used, the agreement can be useful for numerous purposes, best demonstrated through the use of an illustration. Consider the case of a minority shareholder wishing to exit the business and sell his or her stake in the private corporation. Shares of a private corporation are often illiquid especially in the case of a minority shareholding interest. At times, the only plausible purchaser may be the majority shareholder however, the majority shareholder may place an unrealistically low value on the interest. A shareholder agreement is able to address this problem by prescribing a fair method of valuation and a course of action to be followed upon the sale of the shares.

Furthermore, a shareholder agreement can include the following additional measures to ensure a fair outcome for all parties involved:

1. Dispute Resolution: Consideration can be given as to how deadlocks amongst shareholders can be resolved. A common mechanism in a shareholder agreement is to limit the dispute resolution process to mediation or binding arbitration which is a considerably less expensive alternative than seeking restitution through the courts.

2. Unanimous Shareholder Approval: In the case where one shareholder owns the majority of shares, it is important to consider whether any issues exist that should not be decided by a majority vote. A shareholder agreement can set out a class of material decisions which require unanimous shareholder approval to ensure that the majority stakeholder is not able to make unilateral decisions without first obtaining the consent of all stakeholders involved.

3. Share Transfer: A shareholder's agreement typically contains a primary rule that no shares be transferred without prior approval of the directors. This can be supplemented with a number of additional mechanisms to promote liquidity of the shares:  

  • Right of First Refusal: A shareholder who receives an offer from a third party to purchase his or her shares must first allow the existing shareholders the right to match such offer prior to selling to any third party. This mechanism allows the existing shareholders the option to prevent a third party purchaser from becoming a shareholder and exercising control over the corporation in the future.
  • Buy/Sell or "Shot Gun" Provision: This provision allows one shareholder to offer the other shareholders a price and establish the terms under which he or she is prepared to either purchase the other shareholder's interests or sell his or her interest to the other shareholders. It is then up to the other shareholders to decide whether they wish to either buy the offered shares or sell their own shares on the same terms and conditions presented. This provision can be very useful in the event of a shareholder dispute where the relationship between the shareholders has broken down and one party wishes to exit.

4. Funding Considerations: A corporation requires access to capital both upon incorporation and during operation. A shareholder agreement can prescribe how such capital be obtained and ensure that each shareholder contribute the requisite amount in conjunction with his or her interest in the corporation or face a penalty for failure to do so. In the case of debt financing, a shareholder agreement can prescribe how guarantees are to be signed and provide for the sharing of liability amongst shareholders.

The abovementioned provisions are merely intended to provide a brief overview of the content which a shareholder agreement can include whereas the agreement can be expanded to incorporate several additional areas which may be of issue in the future. Regardless of the breadth of the agreement, it is important to remember that corporations are creatures of statute which offer little guidance in the event of a dispute or protection for a minority shareholder. A well drafted shareholder agreement is particularly useful in a closely held corporation to supplement the statutory framework and avoid the exorbitant costs and aggravation of resolving future disputes without guidance.

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.

Jordan Morelli
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.