Shareholder Agreements

A shareholder agreement is not a mandatory requirement, as per legal regulations. A corporation can operate under the provisions outlined in the applicable corporation statute, its articles of incorporation, and by-laws. However, many shareholders find this "default" arrangement unsatisfactory. For instance, minority shareholders may be reluctant to relinquish their decisions entirely to the majority when critical corporate matters arise. Conversely, majority shareholders might wish to have the authority to compel minority shareholders to sell their shares to a third party interested in acquiring the entire share capital of the corporation. In essence, a shareholder agreement is a tool to ensure that each shareholder's interests and investments in the corporation are treated fairly, in accordance with mutually agreed-upon rules.

In the context of a technology startup seeking external investment, there's often a debate about whether founders should establish a shareholder agreement before securing external funds. Some argue that negotiating and entering into such an agreement prior to external investment is an unnecessary use of time and resources since external investors will typically bring substantial changes to the existing agreement. Nevertheless, many founders believe that having a basic shareholder agreement in place even before securing external investment is beneficial. However, care should be taken to avoid provisions that necessitate unanimous consent for actions such as amending the corporation's articles or the shareholder agreement itself, as this could enable a challenging shareholder to obstruct an investment or potential exit.

Key Provisions in a Shareholder Agreement:

A shareholder agreement is not a one-size-fits-all document. It should address various complex issues, each tailored to the specific circumstances and parties involved. The following are key provisions typically found in a shareholder agreement for a startup technology company that has received venture capital funding. The relevance of these provisions will depend on the shareholders' unique circumstances, and it is strongly recommended to seek the assistance of experienced legal counsel to ensure that all shareholders' interests and intentions are adequately considered.

Unanimous Shareholder Agreement:

In cases of small shareholder groups, a unanimous shareholder agreement, which requires all shareholders to be parties to the agreement, is common. This agreement has special status under the CBCA and the OBCA and can restrict directors' powers.

Management of the Corporation:

This section addresses the board of directors, observer rights, procedural matters, and covenants of the corporation.

Board of Directors:

The shareholder agreement should specify the board's size and the manner of electing board members. It can allow certain shareholders or groups to nominate directors, ensuring each shareholder votes shares in line with the agreement.

Observer Rights:

Shareholders without board representation may seek observer rights, allowing them to be present at board meetings and access relevant materials, though without voting privileges.

Procedural Matters:

Provisions on the frequency of board meetings, meeting call procedures, quorum requirements, and other related matters.

Covenants of the Corporation:

Agreements regarding the information provided to investors and the corporation's operation, such as financial statement delivery and insurance obligations.

Dealing with Shares:

This section outlines restrictions and obligations related to the corporation's shares, including restrictions on share transfers, permitted transfers, right to repurchase, pre-emptive rights, right of first refusal, co-sale rights, and drag-along rights.

Right to Repurchase:

Specifies conditions for the corporation to repurchase shares, often triggered by a founder's death, disability, or other circumstances.

Pre-emptive Rights:

Ensures that existing shareholders have the option to participate in future share issuances, preventing dilution of their ownership.

Right of First Refusal:

Allows shareholders to purchase the shares of another shareholder who intends to sell them to a third party, under specified conditions.

Co-sale or Piggy-back Rights:

Provides shareholders with the opportunity to participate in third-party offers to buy shares held by other shareholders.

Drag-along Rights:

Enables certain shareholders to compel others to sell their shares to a third party under specified conditions.

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