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A shareholder agreement is the constitution of a private company: who decides, how disputes break, what a departing shareholder is paid, and what happens on death, disability or a deadlocked vote.
Arrange a Call →A unanimous shareholder agreement under section 108 of the OBCA can transfer the directors powers to the shareholders, and it binds anyone who later acquires shares, whether or not they have read it.
A shareholder agreement is a contract among the owners of a corporation governing decision-making, share transfers, exits, valuation and dispute resolution. You need one as soon as there is more than one shareholder. Without it, a shareholder who wants out has no agreed price or process, and a shareholder who is being excluded is left with an oppression application under section 248 of the OBCA as their only real remedy.
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Articles of incorporation and by-laws establish the corporate machinery: classes of shares, the number of directors, quorum, how meetings are called. They say almost nothing about the relationship between the human beings who own the company. They do not say what happens when one of two equal shareholders wants out, how the shares are priced, whether a shareholder can compete after leaving, whether a widow inherits voting control, or how a fifty-fifty board breaks a tie. A shareholder agreement answers those questions in advance, while everyone still has an incentive to be reasonable.
The absence of an agreement is not neutral. It defaults the parties to the statute, which means a minority shareholder who is being squeezed out has one realistic tool: an oppression application under section 248 of the OBCA. That is a court proceeding, it is expensive, its outcome is discretionary, and it typically takes far longer than the business can comfortably survive. Most shareholder litigation we see would have been resolved in a week by a buy-sell clause that no one got around to signing.
Lexaltico LLP drafts shareholder agreements for start-ups with two founders, family corporations with several generations of owners, professional corporations, and companies bringing in outside investment. We also act on the other side, advising minority shareholders on their rights and negotiating exits under existing agreements.
| Ordinary shareholder agreement | Unanimous shareholder agreement (OBCA s.108) | |
|---|---|---|
| Who must sign | Only the shareholders who choose to participate | All shareholders, without exception |
| Legal character | A contract between the signatories | A contract that also restricts the powers of the directors |
| Effect on directors | None; the board retains full management power | May remove some or all management power from the board and vest it in shareholders |
| Effect on liability | Directors retain their duties and liabilities | Shareholders assume the directors rights, powers, duties and liabilities to the extent of the transfer |
| Binding on a later purchaser of shares | Only if the purchaser agrees to be bound | A person who acquires shares is deemed to be a party to the agreement |
| Typical use | Investor rights, side arrangements between some owners | Closely held corporations where owners want direct control of major decisions |
The unanimous shareholder agreement is a distinctively Canadian device and it is powerful, but the transfer of power carries the transfer of liability with it. Shareholders who take over the directors decision-making also take on the corresponding duties. That is often the right trade for a two-owner company where the shareholders and directors are the same people, and the wrong one where passive investors have no appetite for director-level exposure.
Decision-making comes first. The agreement should list the matters that require more than a simple majority, typically issuing shares, incurring debt above a threshold, selling a material asset, changing the business, admitting a new shareholder, declaring dividends, and approving compensation for shareholder-employees. Setting that list too broadly gives every shareholder a veto and manufactures deadlock; setting it too narrowly leaves a minority with no protection at all.
Transfer restrictions come second. A right of first refusal requires a shareholder who receives an outside offer to offer the shares to the others on the same terms first. Tag-along rights let a minority shareholder join a sale by the majority on identical terms, so the minority is not left holding shares in a company controlled by a stranger. Drag-along rights let a defined majority require the minority to sell, so a buyer can be delivered 100 per cent of the company. Together they are what makes a private company saleable.
Third, the departure triggers: death, permanent disability, retirement, resignation, termination of employment, bankruptcy, and marriage breakdown where a spouse might otherwise claim an interest in the shares. Each trigger should specify whether the purchase is mandatory or optional, who buys, at what price, and on what payment terms. Life and disability insurance owned by the corporation or cross-owned by the shareholders is what turns an obligation to buy into an ability to pay, and the capital dividend account can allow insurance proceeds to be distributed tax-efficiently.
Nothing produces litigation faster than an agreement that says shares will be purchased at fair market value without saying how fair market value is determined. Workable approaches include an agreed price reviewed annually and recorded by resolution, a formula tied to a multiple of normalized earnings or of revenue, an independent business valuation by a Chartered Business Valuator, or a hybrid in which the annual agreed price governs unless it is stale. Whichever is chosen, the agreement should also address minority and control discounts expressly, because whether a discount applies is otherwise the fight itself.
The shotgun, or buy-sell, clause is the classic deadlock breaker. One shareholder names a price per share; the other must either sell at that price or buy at that price. In principle it forces honesty, because naming a low price risks being bought out at it. In practice it favours the shareholder with better access to financing, and it can be brutal in a company where one owner is far wealthier than the other. Alternatives worth considering include a Texas or sealed-bid auction, a right of first offer, a mandatory mediation step, an independent tie-breaking director, or a Russian roulette variant with a minimum price floor.
With two equal shareholders who are also the only two directors, nothing can be approved once they disagree: no dividends, no financing, no sale, no termination. The company continues to incur obligations while being unable to make decisions. If you own half of a business and there is no deadlock mechanism in writing, that is the single most urgent gap in your corporate documents.
Ontario prohibits most non-competition agreements in the employment context. Section 67.2 of the Employment Standards Act, 2000, in force since October 25, 2021, voids non-compete clauses between employers and employees, with narrow exceptions for defined executive roles and for the seller of a business who becomes an employee of the purchaser. Restrictive covenants given by a shareholder in their capacity as an owner, particularly on a share sale, sit outside that prohibition and are assessed on ordinary common law principles.
At common law a restrictive covenant is enforceable only if it is reasonable in duration, geographic scope and the activities restrained, judged against the legitimate proprietary interest being protected. Courts apply a notably more permissive standard in the sale-of-business context than in the employment context, because a vendor who has been paid for goodwill should not immediately compete it away. Even so, an ambiguous covenant is generally unenforceable, because Canadian courts will not rewrite an overbroad restraint to save it.
Non-solicitation covenants, which prevent a departing shareholder from approaching customers, suppliers or employees, are usually easier to enforce and are frequently the better tool. Confidentiality obligations should be separate, unlimited in time for genuine trade secrets, and drafted to survive the termination of every other provision. Where the shareholder is also an employee, the employment agreement and the shareholder agreement must be reconciled so that they do not contradict each other.
Where an agreement exists, most disputes resolve through its own machinery: notice of a triggering event, a valuation, and a closing. Where the agreement has been breached, remedies include specific performance of a share purchase obligation, injunctive relief to restrain a prohibited transfer or a breach of a restrictive covenant, and damages. Well-drafted agreements include a dispute resolution clause specifying mediation followed by arbitration, which keeps the company's financial information out of the public record.
Where no agreement exists, or where the conduct complained of falls outside it, the statutory remedies apply. The oppression remedy under section 248 of the OBCA protects the reasonable expectations of shareholders, directors, officers and other proper complainants; the Supreme Court of Canada set out the analytical framework in BCE Inc. v. 1976 Debentureholders. Section 246 permits a derivative action with leave of the court where the wrong is done to the corporation itself. Section 207 allows the court to order the winding up of a corporation in limited circumstances, which is the remedy of last resort.
Timing matters. The Limitations Act, 2002 imposes a basic two-year limitation period running from the day the claim was discovered, and delay also undermines the discretionary relief that oppression applications depend on. If you believe you are being excluded from information, denied dividends while other shareholders take compensation, or diluted by share issuances you were not offered, get advice promptly. Contact our corporate group to draft, review or enforce a shareholder agreement.
An outside investor will expect terms the founders' agreement probably does not contain. Pre-emptive rights allow existing shareholders to maintain their percentage by participating in future issuances. Anti-dilution protection adjusts an investor's position if shares are later issued at a lower price. Information rights require the company to deliver financial statements and budgets on a schedule. Board representation, or at minimum an observer seat, gives visibility into decisions. And a list of protective provisions gives the investor a veto over defined actions even though they hold a minority position.
Founders should negotiate the corresponding terms rather than accepting a template. Reverse vesting, under which a founder's own shares are subject to repurchase if they leave early, aligns the founding team and is standard in venture financings; the vesting schedule, the acceleration on a change of control and the treatment of a founder terminated without cause are all negotiable. Permitted transfer carve-outs matter as well: a shareholder should usually be able to transfer to their own holding company or family trust for tax planning without triggering rights of first refusal, provided the transferee signs on to the agreement and the transferor remains responsible.
Equity for employees needs its own architecture. A stock option plan, a restricted share arrangement or a phantom equity plan each has different corporate, tax and accounting consequences, and each must be reconciled with the shareholder agreement so that option holders who exercise become bound by the transfer restrictions and drag-along obligations. Issuing shares directly to employees without that reconciliation creates a group of minority shareholders with statutory rights and no contractual obligations, which is precisely the situation the agreement exists to prevent.
Securities law also applies to private companies. Issuing shares is a distribution of securities, and in Ontario it must fit within an exemption from the prospectus requirement, commonly the private issuer, accredited investor, family friends and business associates, or offering memorandum exemptions, each with its own conditions and, in some cases, a report of exempt distribution to be filed. Founders who raise money informally from a wide circle of acquaintances sometimes fall outside every available exemption, which is a problem best avoided at the outset.
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