Unanimous Shareholder Agreement

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You’ll need this if you…

Your business is set up as a corporation.
You have two or more shareholders (owners or investors) of the business.
You want to set up rules about your business relationship.

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What it is

The main agreement between founders and owners of a business.

A Unanimous Shareholder Agreement, also called a “USA”, is an agreement among all the shareholders of a company. Think of it as the rule book for your business relationship. It says who gets to buy new shares in the company and how you’re allowed to sell your shares. It also says how you’ll vote on important business decisions and what happens if you want to sell the company. We’ll even go over things you may not have thought about, like what happens if someone goes bankrupt or goes through a divorce and someone else claims that person’s shares.

Some of the topics that go into a Unanimous Shareholder Agreement

  • Who gets to make important business decisions by being on your Board of Directors
  • What major business decisions have to be approved by the shareholders (the owners and investors of your business)
  • How you’ll handle confidential information and competition
  • When the company is short on money, whether the shareholders will have to come up with the shortfall
  • What happens when shareholders are asked to give a personal guarantee for a company bank loan
  • What happens when someone wants to sell their shares (for example, if the other shareholders will have a first right of refusal)
  • When the company decides to issue new shares, who gets them first
  • What happens when you have an offer to buy your business
  • When a shareholder leaves the company, dies, is sick, or divorces and their shares are part of the divorce settlement, whether the company can buy back the shares
  • Minority shareholder rights
  • Share price valuations

Who needs it

Any business with more than one owner or investor
Established businesses that don't already have a Unanimous Shareholder Agreement

When you need one

Board seats, voting, and decision making.

You can include rules about who will be on your Board of Directors, which is the group of owners or investors that make important decisions about your business. For example, the directors vote on who will be the senior employees of the business (like the CEO), approve large bank loans, decide when the company will sell shares to new investors, and make other major decisions. So, deciding who gets to be on the Board is an important rule.

You can also say when the owners and investors get to vote on major business decisions, even if they are not on the Board. For example, you can say that the shareholders have to approve a large bank loan, an expensive office lease, or a major contract. You can require unanimous (100%) shareholder approval or something less, like two-thirds (67%) approval. There’s a lot of flexibility to decision-making rules for your business.

Rules for selling your business.

Selling or exiting the business is an important thing to think about. What happens if the business gets an offer to be bought? Thinking ahead can make the sale easier. For example, what happens if only some of the shareholders want to sell the business? What happens if the buyer only wants to buy some but not all of the shares? You can create rules for these situations in your Unanimous Shareholder Agreement.

Selling or transferring shares.

Sometimes a shareholder wants to sell their shares to another owner or investor in the business, or even to a third party that isn’t yet part of the business. Without clear rules about selling, this situation can be quite disruptive.

For example, selling the shares to another shareholder could mean some becomes a majority owner of the business, which may not be fair if other owners or investors wanted to buy the seller’s shares. Also, the other owners or investors may not want a third party to become their business partner.

So, the Unanimous Shareholder Agreement can set up rules about selling shares, such as that the shares must first be offered to existing shareholders who can buy an amount of shares to keep their ownership percentage of the business the same (e.g., if they own 20% of the shares today, they can buy up to 20% of the seller’s shares to keep their position the same). You can also put conditions on selling shares to third parties who are not yet involved in the business.

Business finances.

Businesses need money. That may be the only certain thing in business (and basically is what capitalism is about). What happens when sales revenue isn’t enough to cover the business’s expenses? You can set up rules about how bank loans and trade credit (e.g., supplier financing) will be approved by the shareholders. You can also create rules about when shareholders may be required to put their own money into the business, and whether it will be as a loan or additional investment.

Rules about issuing new shares in the company and bringing on new investors.

When someone invests in a corporation to become an owner of it, they get shares that represent their ownership in the business. So if you’re the only owner of your business, you could have 100 shares or 100% of the ownership. If you have two owners, each could have 50 shares or 50% each of the business.

One way corporations raise money is by selling more shares to investors. But should the corporation be able to sell those shares to just anyone? The existing shareholders and investors may not be happy about a new owner coming into the mix.

You Unanimous Shareholder Agreement can include rules about selling new shares in the business, like giving the existing shareholders the first right to buy any new shares. You can also require existing shareholder approval before new shares can be sold to existing or new owners or investors.

Dividends and tax planning.

You may want rules about how shareholders are paid through dividends, such as whether all the classes of shareholders must be paid or just some of them and whether shareholder approval is needed.

You may also want some rules about tax planning, such as whether owners and investors are allowed to move their shares into a holding company, family trust, or other investment structure for tax planning.

Rules about share price valuations.

Sometimes you need to know what the share price should be for your business. This is called the “fair market value” of the shares, and you may need to know it to determine the purchase price of someone’s shares that you wish to buy.

For example, it’s common for a business to have the right to repurchase a person’s shares when they are no longer employed in the business. The price paid for the shares is usually the fair market value or the fair market value less some appropriate discount.

Valuations can lead to disputes since they are not easy to do or agree upon. So, you can set up some rules ahead of time. For example, you can say the fair value of the shares will be what the majority of the shareholders agree it is. You could also have a rule that if the shareholders cannot agree on the value then either the company’s accountant or an independent valuator will come up with the price.

What happens when someone leaves the company or can no longer be a shareholder?

There are certain life events that can really impact someone’s ability to be an owner or investor in your business. Termination of employment is one example. If a shareholder dies then you will need to consider what happens to the shares – are they inherited by someone else or does the company buy them back?

Other life events should be considered too, like divorce or bankruptcy since they can lead to someone else getting the shares. Some other events might be important to think about too, like serious illness or being convicted of a major crime since both can prevent an owner or investor from making decisions about the business when needed.

Your Unanimous Shareholder Agreement can cover all of these topics.

Minority shareholder protections.

Minority shareholders are the owners or investors that have a small stake in the business, and are usually not the founders of the company. To make your corporation a more attractive investment, you may want to include some minority shareholder protections. For example, you could have a rule that says the minority shareholders can choose one person that must be on the Board of Directors.

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What are shares?

When someone invests in a corporation to become an owner of it, they get shares that represent their ownership in the business. Each share is a unit of ownership. So if you’re the only owner of your business, you could have 100 shares or 100% of the ownership. If you have two owners, each could have 50 shares or 50% each of the business.

What are classes of shares?

Shares come in classes. There are two broad categories of shares: Common Shares and Preferred Shares. Common Shares are, well, the regular type (as the name suggests).

Preferred Shares are called “preferred” because they can have special rights attached to them. The primary benefit that makes these shares “preferred” is that they rank ahead of the Common Shares when the business is dissolved or winds down. That means that if the business is dissolved and there is enough money left after the company’s creditors (like banks and other lenders) are paid, the Preferred Shares get their investment back. Only after the Preferred Shares get their investment back will the Common Shares get anything that’s left over.

Shares can be voting or non-voting and you can also set them up in individual classes, like Class A Voting Common Shares and Class B Non-voting Common Shares.

To add to the complexity, you can have sub-classes within shares called “Series”. For example, Class A Voting Common Shares, Series 1, or Preferred Shares, Series 1 or Series 2, etc.

If you’re getting overwhelmed, don’t worry. You don’t need to get fancy with classes and series unless you have tax planning or professional investors involved. A typical share set up could look like this:

  • Class A Voting Shares – used for founders and major investors
  • Class B Voting Shares – used for minority investors that you want to have a say in some business decisions
  • Class C Non-voting Shares – used for minority investors or people you pay with shares but should not be able to vote on business decisions
  • Preferred Shares – if you’re a small business, you likely will only use Preferred Shares if your accountant suggests it as part of a tax planning strategy

There is a lot of flexibility when you structure a business. The important thing is to set up your shares in a way that works for you. If you’re in doubt, you can talk to a lawyer through the Lawyer Marketplace to get some extra help.

What are shareholders?

Shareholders are people or other corporations that own shares in your corporation. Sometimes shareholders are called investors or owners.

What is a Board of Directors?

The Board of Directors is a group of individuals that are responsible for supervising the overall management of a corporation. They vote on who will be the officers of the company (e.g., the Chief Executive Officer and other senior positions). They also approve major business decisions, like large loans and selling shares to investors.

A corporation can have any number of directors on the Board, but the Articles of Incorporation usually set a limit somewhere between 1 and 10.

Directors don’t have to be shareholders, but they often do own shares in the corporation.

Can corporations or businesses own shares in another corporation? What's a "holding company"?

Yes, corporations can own shares in other corporations. Other business entities, like partnerships and trusts, can also own shares in a corporation.

A “holding company” is a corporation that owns shares in another corporation, usually holding those shares for investment purposes. So if you’ve ever heard of a “personal holding company”, that means someone owns a corporation to hold their investments in other corporations.

While we’re on the topic, a “subsidiary” is a corporation owned by another corporation and an “affiliate” is a corporation that shares a common parent company (sometimes these are called “sister” companies, although that word is falling out of favour and “affiliate” is the more common way to describe it now).

What are pre-emptive rights?

One way corporations raise money is by selling more shares to investors. A pre-emptive right is the right of an existing shareholder to buy these new shares before they’re sold to new investors.

For example, if you own 20% of the shares in the corporation and the company decides to issue new shares, your pre-emptive right means you get to buy 20% of the new shares that are being offered. This allows you to keep your ownership position in the company.

A pre-emptive right is an option and not an obligation, so you’re not forced to buy the shares. It’s your choice.

What are drag-along rights?

When someone offers to buy a business, they may offer to buy all of the shares to take control of the corporation. Sometimes, only some of the shareholders want to sell. Drag-along rights mean that if the majority of the shareholders want to sell, they can force – or drag along – the other shareholders to sell their shares so the deal goes through.

For example, if say 65% of the shareholders vote in favour of selling the business but the buyer is only willing to buy 100% of the shares for full control, a drag-along right says that the remaining 35% of the shareholders are dragged into the deal and must also sell their shares.

Your Unanimous Shareholder Agreement can set the majority needed for the drag-along right to apply. It could be a simple 50% majority or a higher percentage you choose.

What are piggy-back rights?

When someone offers to buy a business, they may offer to buy only some of the shares. Usually this is done when the buyer only wants to buy a controlling position but not full control. For example, if the buyer can get 51% of the shares, it can control the company without having to pay for 100% of the shares.

A strategy a buyer may take is to offer to buy the shares of just the majority shareholders. For example, if two shareholders each own 30% of the company, the buyer may only offer to take their shares to get a combined 60% of the company.

The other shareholders may not think that’s very fair. They may want to sell their shares too. A piggy-back right says that for the sale to be approved, the buyer must purchase a proportionate share of all the shares.

In our example, let’s say the buyer wants control of the company but not full ownership and is willing to purchase 60% of the shares. A piggy-back right says that buyer must purchase 60% of the shares held by every shareholder. In other words, the buyer can’t pick and choose whose shares they buy. Instead, they have to buy from each shareholder equally.

A piggy-back right is the mirror image of a drag-along right.

What's a right of first refusal?

A right of first refusal (or a “ROFR” if you want to sound cool) is a right given to someone to have the first right to buy the shares of a selling shareholder.

For example, if a third party (someone who is not already an owner or investor with shares in the company) offers to buy Tom’s shares, a right of first refusal would say the other existing shareholders get the first opportunity to buy Tom’s shares.

The catch? The other shareholders must buy Tom’s shares for the same price and on the same conditions as the third party offer made to Tom. If they don’t, Tom can go ahead and sell the shares to the third party on the original terms and price of the offer.

What's a right of first offer?

A right of first offer (a “ROFO”) is very similar to a right of first refusal. The difference is in the order of events only. It’s a right given to someone to have the first right to buy the shares of a shareholder that wants to go find a buyer. With a right of first refusal, we already have a third party offer. In a right of first offer, the selling shareholder does not yet have an offer and wants to go look for a buyer.

For example, if Tom wants to sell his shares for say $10/share, a right of first offer means he must first offer them to the other existing shareholders who can say yes or no to the $10/share price. If they say no, Tom can then go find a third party (someone who is not already an owner or investor with shares in the company) to buy his shares.

The catch? Tom can only offer to sell the shares for $10/share to the third party. He is not allowed to make a better offer of say $9/share.

What's a shotgun (or "buy sell") clause?

A shotgun forces a shareholder to either sell their shares or buy out another shareholder. When a shotgun clause is used it means someone is leaving the company, but we don’t yet know who it will be.

Sound exciting? It’s definitely dramatic. Shotgun clauses are used to resolve disputes between owners, but they are a fairly extreme way of doing it with big consequences. So, they should be carefully considered before including one in your Unanimous Shareholder Agreement.

Here’s an example of a how a shotgun clause works:

Rebecca and Angela are 50/50 owners of their business and have a dispute about the direction of the company that they can’t resolve. Rebecca sets off the shotgun clause. As the first mover, Rebecca can choose to buy Angela’s shares or she can sell her shares to Angela. Rebecca also sets the price since she started the shotgun.

Angela can accept the offer, or she can reverse it and force Rebecca to take the same offer she made.

Rebecca makes her move…

Let’s say Rebecca triggers the shotgun and says to Angela, “I’m out! Buy my shares for $10/share.” Angela must choose one of two options.

Angela makes her choice…

1. Angela can buy Rebecca’s shares for $10; or

2. She can say to Rebecca, “no, you buy my shares for $10 instead” and Rebecca must buy Angela’s shares.

Someone’s got to go…

In either outcome, one of the shareholders has to go and that consequence is meant to encourage the person triggering the shotgun (Rebecca, in our example) to set a fair price.

But wait, there’s more… Rebecca’s got more to her strategy…

But there can be a problem with this. What if Rebecca knows that Angela has no money and can’t pay for the shares at any price? In this case Rebecca could strategically offer a low price, knowing that even though it’s a low price Angela can’t pay it and, therefore, Angela will have to choose to sell her shares to Rebecca at the low price.

Poor Angela…

In our example, let’s say the fair value of the shares is actually $50/share. Knowing Angela can’t pay even $10/share, Rebecca triggers the shotgun and says to Angela, “buy my shares for $10/share.” That’s an 80% discount! Angela would love to take advantage of the bargain price but can’t. Sadly, Angela has no choice but to take option #2 and say, “No, I can’t buy them, so I have to take option #2, so you buy my shares for $10.” Rebecca just bought the rest of the company for a steal.

Let’s fix this, just a little…

So, we can optionally change the shotgun clause to say the price must be the fair market value of the shares.

Playing with fire

If you’ve read this and are thinking a shotgun clause sounds more like a revolver roulette, you’re not wrong. They’re not used very often because of their unpredictable outcomes.

What's a capital call?

If the Unanimous Shareholder Agreement has a capital call clause, it means that if the company doesn’t have enough money the Board of Directors can vote to require the shareholders to give more money to it so it can continue to operate. Capital calls can be done through:

  • shareholder loans – the shareholder loans money to the business that must be repaid at some point
  • capital contributions – the money is added to the ledger of investments by the shareholder
  • additional shares – the money is treated like a new investment by the shareholder, so they get additional shares

The choice usually comes down to the tax position of the shareholders and what will work best for them. So if it includes a capital call feature, the Unanimous Shareholder Agreement will give the Board of Directors some discretion to choose how to take the money in. Your accountant will help you decide what option to use when you make the capital call.

What's dilution?

Dilution refers to when a shareholder’s position in the company gets reduced.

Let’s say there are 2 shareholders right now – Sam and Brandon – each owning 50 shares. This means each owns 50% of the company.

The corporation decides to raise money by selling new shares to new investors. The Board of Directors approve the sale of 50 more shares to a new investor.

So after the sale, we now have 3 shareholders each owning 50 shares for a total of 150 shares issued. That means each shareholder now owns one third (33%) of the company. Sam and Brandon still own 50 shares each, but now that equals just 33% of the company. Both have been diluted from 50% to 33%.

What are dividends?

Dividends are payments to shareholders and can be in cash or property, including new shares. Dividends are paid when the company has extra cash and wants to give the shareholders a return on their investment. Dividends are also used for tax planning purposes because the tax rate on them can be less than employment income, so small business owners often pay themselves in dividends rather than as a salary (employment income).

Do I have to include all these topics in my Unanimous Shareholder Agreement?

No, you can choose what to include and what you need in your agreement. Your Unanimous Shareholder Agreement is very flexible to be whatever you need or want it to be.