Canada: The Unanimous Shareholder Agreement: More Than Just A Difference In Terminology

You are no doubt familiar with the term "unanimous shareholder agreement". But you may be under the impression that it is simply an alternate version of the term "shareholder agreement". Far from it – it is a very different type of instrument. 

A unanimous shareholder agreement ("USA") is intended to restrict or withdraw, in whole or in part, the powers of a corporation's board of directors. Much more than a mere contract, a USA allows the shareholders to depart from the legislated internal governance rules applicable to business corporations1. Let's see what that entails. 

Restricted powers

First of all, pursuant to a USA the shareholders are able to restrict the powers of the directors. Such a restriction can take various forms, and may or may not require the indirect involvement of the shareholders in the management of the corporation. One approach consists of modifying the majority-vote rule for the adoption of decisions by the board. This may be done by increasing the number of required votes, requiring a special majority, or creating a veto right. Another approach is to make board decisions subject to prior approval of the shareholders. Despite its popularity, many prefer to avoid the latter approach, because its twofold decision-making process risks more or less significantly delaying the making of decisions. 

Example: XYZ Corporation is owned by A, B and C. A holds 80% of the voting shares, while B and C hold 10% each. The board of directors consists of A, B and C. To avoid B and C being able to make all corporate decisions to the exclusion of A, the decision on some important matters involving the corporation may be made subject to the concurring vote of A. Thus, A retains control over such decisions while allowing the minority shareholders to be involved in the day to day management of the corporation. 

Withdrawal of powers

The ability to withdraw the powers of the directors gives the shareholders the right to assume some or all of the powers normally reserved for the board. This has the advantage of allowing the shareholders not only to exercise direct control over the corporation's affairs, but to bind themselves in advance on how they will vote on decisions made pursuant to these new powers, something directors cannot do. It should be noted however that withdrawing powers from the directors is not risk-free, because once the USA takes effect, the shareholders become responsible for the obligations and liabilities of the directors. 

Example: ABC Corporation is owned by X, Y and Z. X holds 80% of the voting shares, while Y and Z hold 10% each. The board of directors is composed solely of X. To avoid X being able to make all corporate decisions, particularly ones of special concern to Y and Z, it may be agreed to withdraw the power of the board to make the latter kinds of decisions and make them subject to the affirmative vote of at least 95% of the shareholders. Y and Z thus have the right to vote on such decisions, which otherwise would not be subject to their approval, and can prevent the adoption of any such decision they may disagree with. 

We will not attempt to list all of the matters that can potentially be made subject to a USA. In each case that choice must be made following an in-depth discussion by the shareholders, and will depend on their individual needs and circumstances. Some of the more common examples, however, are declaring and paying dividends, issuing shares, appointing officers, and making decisions outside of the normal course of business. 

It should be noted that in order to be valid, a USA must be signed by all of the shareholders, whether or not their shares carry the right to vote. In addition to these signing shareholders, the USA will be binding on all future shareholders, provided they are notified of its existence. A copy of the USA must be kept as part of the corporate records and be available for consultation by any shareholder or creditor of the corporation. 

You should also note that the existence of a USA must be disclosed to Quebec's Enterprise Registrar (the "Registrar"). Plus, if all the powers of the directors are withdrawn, the name and address of the shareholders must be entered in the minute book of the corporation must be registered to the Registrar instead of those of the directors. 

Finally, it is important to note that a USA terminates automatically if the corporation becomes a reporting issuer under the Securities Act or if the corporation merges pursuant to a long-form amalgamation, unless otherwise specified in the merger agreement. 

While the conclusion of a USA may at first blush appear relatively simple, there are many important considerations involved. We therefore recommend that you consult a lawyer before signing one.


1. This article deals with corporations subject to Quebec's Business Corporations Act (R.S.Q. c. S-31.1). The rules that apply to corporations governed by the Canada Business Corporations Act (R.S.C. 1985, c. C-44) may differ.

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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