Canada: Unanimous Shareholders Agreements: An Important Part Of A Lender’s Due Diligence

Benjamin Franklin once said, "Diligence is the mother of good luck".1  Although Franklin was obviously not speaking about unanimous shareholders agreements when he made that statement, his words of wisdom still apply in today's corporate lending world.  Unanimous shareholders agreements ("USAs") are one type of document where a little due diligence can bring good luck in the form of avoiding surprises, as USAs may contain clauses that can be problematic for lenders if those clauses are not addressed in the loan and security documents. 

As part of its due diligence review for a new credit proposal, a lender should ask its prospective borrower about the existence of any USAs affecting the borrower, any guarantor or other credit party and the general scope of the terms of each agreement.  Most provincial corporate statutes provide that the terms of a USA may restrict in whole or part the powers of the directors to manage or supervise the management of the business and affairs of the corporation.2   By doing so, the terms of a USA are essentially made paramount to any provisions contained in a corporation's articles and by-laws relating to the powers of the directors, such that USAs are definitely something lenders should investigate at their earliest opportunity.

Here are some common provisions of USAs that may create problems for a lender if not identified and addressed during the due diligence process:

Restrictions on Borrowing and Granting Security

USAs often contain restrictions on the borrower's right to obtain loans and advances, to provide security for those loans and advances and to guarantee the indebtedness of others.3  Typically, these activities may require the consent of all shareholders or a super-majority of shareholders rather than merely the consent of the directors.  Identifying and obtaining these consents as a pre-condition to closing will ensure that minority shareholders do surface later and allege the loan and security held by the lender are invalid because their consents were not obtained.  An officer's certificate from the borrower should also be obtained confirming either that the USA does not restrict the powers and activities of the borrower, or if the USA does contain those restrictions, that all such restrictions have been complied with in connection with the execution, delivery and performance of the loan and security documents.  Lenders are frequently asked by borrowers to forego the receipt of a legal opinion of borrower's counsel on the loan and security documents, making it more important that a lender address any impact a USA may have upon the borrower's authority to execute and deliver the loan documents.

Restrictions on the Granting of a Pledge of the Borrower's Shares

USAs traditionally include restrictions on the transfer of the shares of the borrower, with "transfer" usually defined to include any shareholder granting a pledge to a lender of that shareholder's shares of the borrower.  The consent of all of the other shareholders will likely be needed for the pledge of the shares of the borrower by any other shareholder.  Obtaining these required consents as a pre-condition to closing will ensure that the granting of the pledge is not subsequently contested.

Restrictions on Transfer of the Borrower's Shares upon Enforcement of a Pledge

The share transfer restrictions referred to above will in most cases equally apply to any realization or enforcement upon the pledge and the transfer of pledged shares to a third party upon any such realization or enforcement.  Most share certificates will bear a legend outlining the fact that the shares represented by the certificate are subject to the terms of a USA. Once again, obtaining the prior written consent of all shareholders to a future transfer of the pledged shares as a pre-condition to closing will ensure that the enforcement of the pledge is interrupted or delayed.

Agreement to be Bound by the Terms of the USA

Care must be taken to ensure that the USA does not contain provisions which would cause the lender to become unintentionally bound by the terms and provisions of the USA and deemed to be a shareholder simply by reason of its taking the pledge of shares.  Most provincial corporate statutes also usually contain provisions which state that if a USA is in effect when a person (who was not a party to that agreement) acquires a share, that person shall be deemed to be a party to the USA whether or not that person had actual knowledge of it.4  So lenders should exercise caution in realizing upon any pledged shares that are subject to a USA.  Inadvertently becoming a party to the USA could lead to obligations for the lender under the shotgun buy-sell provisions, rights of first refusal provisions and funding terms of the USA.  Written consents to any future transfer of shares arising upon any enforcement will need to be obtained from all shareholders and other parties to the USA as a pre-condition to closing so that everyone acknowledges and agrees that the lender does not become a party to the USA nor subject to the restrictive terms merely by enforcing the pledge and selling the pledged shares to a third party. 

Extended Reach

Sometimes the activities of a borrower or other credit party can be restricted even when it is not a party to a USA, but its parent corporation is subject to a USA.  USAs may contain provisions stating that its terms apply not only to the subject corporation, but also to its subsidiaries.  Thus a lender should check to determine whether the parent of the borrower is a party to the USA with an extended reach provision as described above that could impact upon loan and security documents delivered by the borrower, or a pledge of the borrower's shares.


"One size fits all" has never been a term used to describe USAs, so there may be other terms in your borrower's document that could impact upon your loan arrangements or raise another type of issue to be addressed.  So it pays to obtain a copy of any USA early on as part of your due diligence process and have it reviewed by your counsel in order to increase your chances of enjoying good luck and fewer surprises with your new loan.


1 American author, scientist and politician, 1706-1790.

2 See Section 108 of the Business Corporations Act (Ontario), RSO 1990, c B.16, as amended  [OBCA].  This submission only addresses unanimous shareholders agreements.  However, the same principles apply to unanimous shareholder declarations, voting trust agreements and similar documents.

3 For simplicity, this submission only addresses the prospective borrower in detail.  However, the principles apply equally to guarantors and other credit parties executing and delivering loan and security documents to the lender, or are the subject of a share pledge agreement.

4 See Section 108 of the OBCA.

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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