Shareholder Agreements

A shareholder agreement is the most important document a multi-shareholder corporation can have. It governs how the business will be run, how decisions will be made, how disputes will be resolved, and what happens when a shareholder wants to exit — whether voluntarily, through death, disability, or disagreement. Without a shareholder agreement, these critical issues are left to default rules under the Ontario Business Corporations Act, which rarely align with what the shareholders actually intended. At Goldstone Law Professional Corporation, we draft comprehensive, tailored shareholder agreements for corporations of all sizes, from two-person startups to multi-partner professional corporations. We also review and advise on existing shareholder agreements when clients are considering entering into them or when disputes arise.

What Does a Shareholder Agreement Cover?

Voting Rights and Corporate Governance

A shareholder agreement can specify how decisions are made within the corporation — what decisions require unanimous consent, what decisions can be made by a majority, and how the board of directors is structured and elected. For shareholders who are minority owners, governance protections are particularly important, as they can ensure that minority shareholders have a meaningful voice in key decisions affecting the business.

Restrictions on Share Transfers

Without a shareholder agreement, a shareholder is generally free to transfer their shares to anyone, including a competitor. A shareholder agreement can include transfer restrictions — such as rights of first refusal, drag-along rights, and tag-along rights — that protect existing shareholders and preserve the integrity of the ownership group.

Shotgun Clauses and Buy-Sell Provisions

A shotgun clause (also known as a buy-sell provision) is a dispute resolution mechanism that allows one shareholder to offer to buy the other’s shares at a specified price — with the obligation that if the offer is refused, the offeree must purchase the offeror’s shares at the same price. Shotgun clauses are effective at resolving deadlocks but must be carefully drafted to account for the specific circumstances of the shareholders involved.

Dividend Policy

A shareholder agreement can specify the corporation’s dividend policy, including minimum distributions or formulae for determining what portion of profits will be distributed versus retained in the company. This is particularly important where shareholders have different expectations regarding their return on investment.

Death, Disability, and Departure

What happens if a shareholder dies or becomes permanently disabled? What happens if a shareholder wishes to retire or is terminated as an employee? A well-drafted shareholder agreement will address each of these scenarios, specifying the valuation mechanism for the departing shareholder’s interest, the purchase price payable, and the payment terms. Funding these obligations through life insurance or disability insurance is also an important consideration.

Non-Competition and Confidentiality

Shareholder agreements frequently include non-competition and non-solicitation provisions that restrict departing shareholders from competing with the business or soliciting its clients and employees for a specified period after their departure. The enforceability of these provisions under Ontario law depends on their scope and reasonableness.

Unanimous Shareholder Agreements

A Unanimous Shareholder Agreement (USA) is a special type of shareholder agreement under the Ontario Business Corporations Act that restricts or transfers the powers of the directors of the corporation to the shareholders. USAs are commonly used in closely held corporations where the shareholders wish to retain direct control over specific decisions that would otherwise be delegated to the board of directors.

Frequently Asked Questions — Shareholder Agreements

When is the best time to put a shareholder agreement in place?

The best time to put a shareholder agreement in place is at the time of incorporation or when a new shareholder joins the corporation. At this stage, the parties are aligned and motivated to reach agreement. Once a dispute arises or business relationships deteriorate, negotiating a shareholder agreement becomes significantly more difficult and expensive.

What happens if shareholders cannot agree on valuation?

A well-drafted shareholder agreement will include a valuation mechanism — such as an agreed formula, an independent appraisal process, or a combination of both — to resolve disputes over the value of a departing shareholder’s interest. Without a pre-agreed valuation mechanism, valuation disputes can become costly and contentious.

Contact Goldstone Law to discuss your shareholder agreement. We draft comprehensive, practical agreements that protect your interests and provide a clear framework for your corporation’s governance.