Many corporate documents regarding the formation and governance of a corporation must be filed with the national government and updated as appropriate. Other documents, while no less vital to the formation and governance of a corporation, need not be filed with the government. That does not diminish the importance of those documents, least of all the shareholders’ agreement. These agreements set forth the terms of ownership of share, classes of share, shareholder powers, and many other matters that affect how a corporation is governed.
What is the Shareholder Agreement?
A shareholder agreement is exactly what it sounds like: an agreement that is entered by the shareholders of a corporation. Sometimes only some shareholders have to sign the agreement, but it is more common for all shareholders to sign. The shareholder agreement need not be filed with the government under the Canada Business Corporations Act, but the CBCA sets forth a number of requirements for shareholder agreements, with the simplest being that it must be in writing and, like any contract, signed by all parties to the agreement.
Under the CBCA, shareholders are allowed to enter agreements that limit the powers of the corporate directors regarding overseeing the operations of the corporation. The fewer shareholders there are, the more personal the relationship between shareholders is likely to be, more like a partnership than buying shares in a publicly traded corporation. In such circumstances, such as in very small corporations, each shareholder might want to retain a substantive say in how the corporation operates or is governed. Shareholder agreements can set forth what kind of say shareholders will have. Among other things, a shareholder agreement can:
- Set out the rights, powers, and duties of the corporate officers and other management personnel
- Set forth the rights of existing shareholders with respect to further sales, distribution, or issuance of more shares.
- Give the shareholders who are party to the original shareholder agreement the power to approve future shareholders
- Allow shareholders party to the agreement to set the number of members for the board of directors and establish what their duties will be
- Set forth the selection process for directors. This is especially important in very small corporations where a single shareholder might hold more than 50 percent of all corporate shares. Minority shareholders are unlikely to want a single shareholder to have the power to select all of the directors
- Establish rules regarding options to buy or sell shares
- Set forth procedures, including valuation of shares, to be used upon the retirement or death of any shareholder
Many shareholders’ rights are set forth in the CBCA, such as requirements for shareholders meetings, proxy voting requirements, notification requirements, and other procedural issues. However, the shareholder agreement is intended to deal with elements that do not fall under the CBCA and rather are at the discretion of the shareholders creating the agreement.
When Forming a Corporation in Toronto, Talk to Beganyi Professional Corporation
A shareholder’s agreement is a vital document for the smooth operation and governance of a corporation. Beganyi Professional Corporation is ready to assist with any corporate legal needs you might have in the greater Toronto area, including Mississauga, Brampton, Oakville, Hamilton, and Milton.