A Unanimous Shareholder Agreement (USA) is a powerful legal instrument that governs the relationship among shareholders of a corporation. They are permitted by corporate statutes and allow parties to customize their relationship within limits.
A USA is a binding contract that requires the unanimous consent of all shareholders whose primary purpose is to regulate the management and affairs of the corporation, define the rights and obligations of shareholders, and control the transfer of shares.
By establishing a clear framework for decision-making, dispute resolution, and the protection of shareholder interests, a USA serves as an important tool to ensure corporate governance aligns with the collective vision of its stakeholders. USAs are bespoke, highly customizable agreements, and shareholders should work with their lawyers to create an agreement suitable to their circumstances.
This article explores the foundational role of USAs in shaping corporate governance and protecting shareholder interests. Since every USA is bespoke, the clauses that follow are merely illustrations of terms practitioners most often encounter.
The Essential Elements of a Unanimous Shareholder Agreement
1. Governance Provisions
Governance provisions are an essential element of any USA. These provisions address the appointment of directors and officers, the number of directors and officers, the selection of accountants, and the authorization of contracts. It is similarly important to include a clause that terminates any prior agreements between the parties, to ensure that the USA stands alone as the definitive encapsulation of the relationship.
Notably, under section 140(2) of Manitoba's corporate legislation, The Corporations Act (Manitoba) , a USA can restrict the powers of the board of directors to manage the corporation's business and affairs, transferring those responsibilities to the shareholders. As outlined in section 140(5), shareholders party to a USA assume the rights, powers, duties, and liabilities of directors to the extent that the agreement limits the board's authority, thereby relieving the directors of corresponding obligations.
Sections 97(1) and 98(1) of The Corporations Act (Manitoba) describe the default responsibilities of directors, which may be displaced by a USA. The former states that unless all shareholders agree otherwise in a unanimous shareholder agreement, the directors are responsible for managing or overseeing the management of the corporation's business and operations. The latter states that unless the corporation's articles, bylaws, or a unanimous shareholder agreement state otherwise, the directors can create, change, or cancel bylaws that govern the corporation's operations by passing a resolution.
2. Restrictions on share transfers and mechanisms for buy-sell arrangements
USAs frequently include mechanisms to control share transfers and address exit scenarios through structured buy-sell arrangements. Many USAs carve out 'permitted transfers'—exceptions such as transfers to affiliates, family trusts, or holding companies—while otherwise prohibiting dispositions that fall outside these narrowly defined categories. The purpose of share transfer restrictions is to tightly control ownership by limiting share transfers.
Shareholder agreements typically outline provisions for the event of a third-party sale, including drag-along rights, which enable majority shareholders to force minority shareholders to sell their shares in a corporation sale to ensure a clean exit. Furthermore, tag-along options enable minority shareholders to join a sale initiated by the majority on the same terms, thereby protecting them from being left behind. A right of first refusal may also be included, further ensuring that existing shareholders or the corporation have the first opportunity to buy shares before they are sold to external parties.
There are often buy-back provisions that allow a corporation or existing shareholders to purchase shares in the event of certain triggering events, such as a shareholder's death or insolvency.
Upon a shareholder's death, the USA often requires that their shares be repurchased by the corporation or sold to other shareholders, rather than being transferred (directly or indirectly) to an individual's heirs. These provisions are technically complex and require serious consideration and professional advice.
3. Procedures for resolving deadlocks or disputes
The USA often provides that in the event of any dispute among shareholders concerning the interpretation or construction of a USA, such dispute shall be resolved through mediation or binding arbitration by a single arbitrator. This can be more efficient than the parties going to court.
4. Rules on financing and shareholder contributions
Many USAs outline how the corporation will handle additional funding needs and related obligations. Typically, the agreement will set out a capital contribution hierarchy: borrowing from third parties first, followed by proportional shareholder contributions if required. Although the parties may provide that shareholders are not obliged to advance funds. The payment terms of any shareholder advances will be set out in the USA, which may include that such loans be interest-free or bear commercial interest, be repayable on debt or with a fixed term, etc.
Shareholders typically agree to prioritize the corporation's external financing over their own loans if the board requests it, meaning their loans and interest may take a backseat to other borrowings.
A USA typically provides that shareholders are not required to guarantee corporate debt, but many USAs allow them to do so by unanimous agreement; any guarantees are often allocated pro rata to shareholdings unless the parties agree otherwise. The agreement may also include compensation clauses specifying whether shareholder-employees are entitled to a salary, hourly wage, or no compensation at all.
5. Valuation methods for shares
A USA will often set out how the shares of the corporation will be valued in the case of certain triggering events. When a valuation is required, the USA might provide that the parties should first attempt to agree on price (either unanimously or by a stated majority). Failing agreement within the prescribed period, an independent valuator is often said appointed, usually by the board or a majority of shareholders or by the corporation's accountants. Moreover, the USA typically provides that the valuation shall be conducted promptly, and the valuator's determination of fair market value shall be final and binding, with no right of appeal by any shareholder.
6. Non-Competition and Non-Solicitation
Confidentiality, non-solicitation, and non-competition clauses are often included to bind shareholders to maintain the confidentiality of the corporation's proprietary information, refrain from soliciting employees or clients for a reasonable period, and abstain from engaging in competitive activities against the corporation for a reasonable period within a specific geographic boundary. The enforceability of such covenants is fact-specific; parties should seek tailored legal advice.
7. Independent Legal Advice
Given that USAs typically involve multiple shareholders, each shareholder is always advised to obtain independent legal advice, to ensure a clear understanding of their rights and obligations under the USA. This also helps to ensure that the clauses in the USA are strictly enforceable.
Tailored Advice
Drawing on the strength of our multidisciplinary team, we provide pragmatic and tailored solutions that will help your business achieve its goals. We advise on the full range of governance issues, including board functions and duties, governance policies, conflicts of interest and director and officer liability.
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.
