Increasingly, we are seeing clients with unanimous shareholder agreements (USAs) that allow themselves to be amended by a certain majority of the shareholders of the corporation. This makes a lot of sense for clients with small minority shareholders who they don't want to have to chase down every single time there is to be a change to the USA. That said, it raises certain questions, both taxonomically and legally, about a "unanimous shareholder agreement" created through amendment that is not signed by every shareholder.
What is a Unanimous Shareholder Agreement?
As a lawyer, the legal question is most important and interesting to me, but in order to answer it, we need to take a closer look at what constitutes a USA. A USA is both a creature of statute and a contract governed by contract law. In fact, it is theoretically possible for a USA to be a binding contract without meeting the requirements set out for it under statute.
Under statute, the Canada Business Corporations Act (the CBCA) only recognizes a shareholder agreement as a "unanimous shareholder agreement" if it is a written agreement among all the shareholders of the corporation that restricts, in whole or in part, the powers of the directors to manage or supervise the management of the corporation. If a USA does not meet any one of the requirements set out, it would not be considered a USA as defined by statute. The CBCA does not actually explicitly state whether amending a USA requires consent from all shareholders to the USA, but the implication of the language seems to be that it would.
Meanwhile, practitioners and scholars have argued that the USA, regardless of the statutory requirements, at its core, is a contract between parties. If we are treating it like a contract, it follows that parties should be permitted to negotiate and determine the shareholder approval threshold required to amend such contract and be bound by such terms in the contract. There is some case law backing this up, too, as decisions suggest that the courts will generally enforce the terms of the USA with the assumption being that parties are or should be aware of the terms of the USA to which they or their predecessors have agreed upon.1 This is also consistent with the provision in the CBCA where a purchaser or transferee of shares is deemed to be a party and be bound by the terms of the USA.
Amending a Unanimous Shareholder Agreement
What to do, then, when the corporation wants to amend provisions related to restricting the powers and duties of directors, which is a statutory and contract aspect? Currently, case law does not provide guidance in the scenario where amendments are made to alter or expand the restrictions on the powers or duties of the directors. Over time, these restrictions may be subject to a higher level of scrutiny from the courts and may not be enforceable if it is found that shareholders incur liabilities that would otherwise have been subject to the directors when certain rights, powers and duties are transferred to the shareholders under the USA.
Undeterred, we as legal practitioners have backstopped this problem to the best of our abilities, often using one of the following mechanisms:
- Power of Attorney (PoAs) – In practice, the form to appoint a PoA is usually included in the USA itself or attached as a schedule whereby the shareholder agrees to appoint an officer of the company (usually the CEO) to sign and approve the amended USA on behalf of the shareholder.
- Voting Trust Agreement (VTAs) – Also known as pooling agreements, Voting Trust Agreements allow shareholders to transfer their shares to a trustee who will then vote those shares according to the terms of the agreement. In this context, VTAs could include a provision stating that the trustee is required to vote according to the will of the majority to approve the amendment of the USA.
Takeaways
As much as I don't like to end a blog post with a shrug and a "maybe", the three things I will tell you are:
- So far, the above is all market practice in Canada;
- The courts have only looked at the issue in a limited scope; and
- If you ask me what you should do to amend your USA, I'm going to try to just get you to get everyone's signature to avoid this whole headache. You're not necessarily stuck if you can't, but we starting wading into that territory we lawyers put a giant "LEGAL RISK" stamp on when we write you emails about it.
The author would like to thank Jenny Ng, Articling Student, for her assistance in preparing this legal update.
Footnote
1 Re Systemcorp A.L.G. Ltd., 50 BLR (3d) 163, Justice Farley wrote in his decision that "all shareholders have by their being bound by the USA agreed that they have placed their trust in the wisdom of the specified majority who have agreed to accept such an offer."
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