Shareholders Agreement: Does my company need one and what do I need to know?


A shareholder agreement is a contract between some or all of the shareholders of a corporation that outlines the details of how the business will operate.  It generally deals with issues such as roles of the shareholders in the business, profit and loss sharing mechanisms, dispute resolution, and share transfers in the case of death or disability. They also may include contractual obligations between the shareholders and the company such as non-competition covenants, confidentiality agreements, and obligations to purchase shares in the case of death or disability of a shareholder.  This post aims to explain the major issues addressed in a shareholder agreement in order to provide a better understanding of the document and how it may help your company. It is important to remember that each company is unique and comments made below are not legal advice.

a)     Conduct of the Affairs of the Company

Many aspects of conducting the affairs of the company may be included in the Article of Incorporation.  In fact, some aspects are required to be in the Articles if they are to be effective.  However, the Articles are a public document whereas the shareholders agreement allows a company to go into greater detail without revealing to the public how the company is managed.

One major issue often addressed by the “Conduct Affairs of the Company” section in a shareholder agreement is protecting minority shareholders from being excluded by majority shareholders.  If one shareholder has a majority interest (anything above %50), that shareholder has the power to outvote the minority and unilaterally determine the direction of the company by determining the number of directors and who will act as director. In order to protect the interests of a minority, a shareholder agreement can predetermine the make up of the board of directors to ensure the minority shareholder has adequate representation. For example, allowing each shareholder to nominate a member of the board may be an effective way to balance majority interests because each board member has one vote rather than a percentage of ownership like the shareholder. A shareholder agreement can also include quorum requirements or unanimous board approval for the transaction of business to ensure a minority interest is reflected business decisions.

b)     Financing

There may come a time in a company’s existence where more money is needed to finance expansion or profits are ready to be distributed.  A shareholder agreement can provide clarity as to the rights and obligations of a shareholder in these circumstances.  With respect to borrowing money, a shareholder agreement can stipulate whether the company must try to obtain funds from an institutional lender prior to turning to the shareholders. Also, it can dictate whether shareholders are obligated to advance funds and if so, how those loans are to be repaid.  With respect to distribution of profit, a shareholder agreement can include a statement that distribution will occur after a board resolution showing adequate reserves are held to honour all agreements, the frequency of distribution and any priorities that may exist (eg. repayment of loans).

c)     Restrictions on Transfer of Shares

Generally, the Articles of a company contain minimal provisions regarding share transfer, such as approval by the board, but they do not place any other restrictions on transferring shares, thus putting a shareholder at risk of sharing ownership with an unwanted party.  The three common ways to mitigate this risk are the right of first refusal, piggyback and draw along rights.

The right of first refusal allows the existing shareholders an opportunity to buy the shares of the selling shareholder prior to those shares being made available to an outside buyer. This can be accomplished in one of two ways.  First, the shareholder wishing to sell shares can make an offer to the existing shareholders stating the number of shares available, the price, and the terms and conditions of the sale.  Alternatively, the selling shareholder can go out into the market and obtain an offer for the available shares and presenting the existing shareholders with that offer.  The existing shareholders have a right to purchase the shares for the stated offer prior to sale to the outside party.  The shareholder agreement should stipulate time frames for acceptance of the offer in either circumstance. It should also state whether the existing shareholders are required to buy all of the shares offered or just a portion.  This last point is important because it may allow an existing shareholder to obtain a greater percentage of ownership or create a majority interest without having to purchase all of the shares for sale.

Piggyback rights are a condition that may attached to shares when there is a majority shareholder that owns more than 50% of the shares of a company and that shareholder wishes to sell.  Piggyback rights are enacted when a majority shareholder receives an offer from a third party to purchase the entire interest of his/her shares. If included in the shareholder agreement, they allow the other (minority) shareholders to “piggyback” on the offer and sell their shares for the same terms and conditions set out in the third party offer.  The piggyback is not usually mandatory but it protects the minority shareholder from being under a majority they may not wish to partner with. It also prevents the majority shareholder from reaping the benefits of a lucrative sale without affording the same benefits to the minority shareholders.

Draw Along rights are similar to piggyback rights except they empower the majority shareholder to force a sale of the minority shares. If a majority shareholder obtains an offer from an outside party to purchase the entire majority interest of shares and the other shareholders do not enact their rights to buy the shares under the right of first refusal, the majority shareholder can force the other shareholders to sell their interest in the company for the same terms and conditions accepted by the majority shareholder.  The purpose of this clause is to make the potential sale of a majority interest in a company more attractive to potential buyers because they can obtain complete control and ownership rather than simply a majority interest subject to the existing arrangements with the minority shareholders.

d)     Shotgun Clause or Compulsory Buyout

The shotgun clause is often a last resort when shareholder disputes become unresolvable.  The shotgun clause allows a shareholder to present an offer to force the remaining shareholders to either buy all of the offering shareholders shares at fair market value OR sell the remaining shares in the company to the offering shareholder.  The shareholder that enacts the clause determines the fair market value and terms and conditions of the offer.  The remaining shareholders are protected from unreasonably low offers because they are the ones who determine whether to buy or sell.  If an offering shareholder sets the price too low, he/she will have to sell the shares for the low price. In some cases, the shareholder agreement will want to address how minority interests are protected during the time between when the offer is made and when the sale is complete.  For example, if a minority interest enacts the shotgun clause, it may be a good idea to have a clause placing a restriction on issuing dividends to prevent the majority shareholder from reducing the cash flow of the business after the clause is enacted but before the sale is completed.

e)     Shares Transfers on Death

This may be one of the more important areas of a shareholder agreement because it plans for the unexpected case of death of a shareholder.  Without a shareholder agreement, the death of a shareholder may leave a close relative or spouse assuming control of the shares to the dismay of the existing shareholders.  By planning in advance, a shareholder agreement will outline a method for a mandatory sale of the shares either back to the company or to the remaining shareholders at fair market value (determined immediately prior to death).  The agreement may also require the company to carry insurance for its shareholders in order to cover the cost of buying shares should a shareholder die.  Another type of insurance companies might carry is key person insurance which allows them to go into the market and replace essential personnel in the case of death. It is important to consult with a tax specialist when determining how the shares of the company will be transferred in the case of death because there are different estate and income tax issues that need to be addressed.

f)      Defaults

Becoming a shareholder in a corporation brings with it certain expectations from the other shareholders with respect to running the business.  What happens when a shareholder fails to live up to those expectations?  Absent a shareholder agreement, there are few legal remedies available under the BCA and at common law to address the situation when a shareholder fails to fulfill the obligations of the shareholder agreement.  Some common circumstances of default are a creditor attempting to fulfill a judgment by seizing shares, failure to comply with a separate employment contract, or becoming incapacitated.  A shareholder agreement will provide the defaulting shareholder with an opportunity to remedy the default.  If it is financial, the other shareholders may remedy the default in the form of a loan to the defaulting shareholder with a high interest rate. If it is not financial, the agreement may outline a method for selling the shares of the defaulting shareholder to the remaining shareholder.

g)     Non-compete covenant

In some cases, a shareholder agreement will contain a covenant to prevent the shareholders from engaging in business that directly competes with the corporation both while they are shareholders of the corporation and after they leave. While it might seem like a good idea, the enforceability of these covenants is not always straightforward.  Whether or not a covenant to not compete will be upheld depends largely in how it is drafted.  In a commercial context, a court will examine the geographic reach of the restriction, the period of time for which it is effective, and the extent of the activity that is prohibited in relation to the specific business at issue.  There is a presumption of freedom of contract but a court will not uphold a covenant not to compete if it is unreasonable in the specific circumstances. Furthermore, if the covenant is drafted in an employment context (if a shareholder is also an employee), there may be different factors that will affect the enforceability of a non-competition clause.


I hope this post has given you a better understanding of shareholder agreements and how they can benefit your company.  Discussing the issues upfront and establishing clear guideline at the outset when everyone is getting along could save money down the road when an unexpected event arises or relationships break down.  The issues presented here are generalizations and do not address specific situations.  Also, this post is not intended to be legal advice.  It is important to discuss with a lawyer how a shareholder agreement can be tailored to fit your company’s needs. For more information please contact


Basic Duties of Directors and Officers

The duties of directors and officers of a corporation are dictated by the Canada Business Corporations Act (CBCA) and the British Columbia Business Corporations Act (BCBCA).  The courts have interpreted these laws in order to determine what is expected of directors and officers entrusted with the day-to-day operations of a corporation.

The biggest advantage of incorporation is limited liability for the directors and officers operating the company.  However, limited liability can only protect you so long as you fulfill certain duties.  If a director or officer fails to live up to their duties, the “corporate veil” of protection is lifted and the director or officer may be found personally liable.

In a startup or small company, the directors and officers may be the same people but as a company grows, the duties and responsibilities eventually need to be divided.

Directors are elected by shareholders to manage or supervise the management of the corporation’s business.  The law requires directors to:

  1. act honestly and in good faith with a view to the best interests of the corporation; and
  2. exercise the care, diligence and skill that a reasonably prudent individual would exercise in comparable circumstances.

The duty of honesty and good faith is also known as the fiduciary duty.  A director must act in the best interest of the corporation and may not be in an actual or potential conflict of interest with the corporation.  For example, a director is not permitted to carry on another business that competes with the corporation’s business.   This duty is designed to protect a corporation from the people who control it using the corporation to their personal benefit.  Liability is not limited to personal benefit.  Personally liable will be found if confidential information received in the capacity as director/officer is used to benefit either themselves personally or another entity he/she has an interest it.    If a potential conflict arises, directors and officers must take steps to ensure the conflict is disclosed to the corporation.

It is important to note that a director’s fiduciary duty is to the corporation, NOT the nominating shareholders.  The director will not be protected by the limited liability of a corporation if he or she acts in the best interest of a nominating shareholder over those of the corporation.

The care, diligence and skill requirement requires directors and officers to be able to show, at a minimum, that they were responsible in exercising their discretion.  What determines a “reasonably prudent individual” is subjective and depends on \ qualifications of the director/officer, the significance of the action, the time available to make the decision, and the alternatives that were available to the corporation.

Directors and officers are not expected to be perfect but they must exercise reasonable business judgment.  Courts will not penalize prudent business decision if they were made honestly and in good faith even if they turn out to be poor decisions.  Directors and officers must only be diligent in collecting information and make business decisions in an impartial and informed manner.

If you have any further questions about the duties of directors and officers, please contact

Business Structure: Should I incorporate?

After choosing a name, the next step in starting a business is the decision of what type of business structure to use. Many small business owners assume that incorporation is the most advantageous structure without fully understanding why it is advantageous or whether it is necessary.  Below is an overview of the advantages and disadvantages of Sole Proprietorships, Partnerships, and Corporations; the three most common business structures in British Columbia:

Sole Proprietorship 

A sole proprietorship is the least expensive and easiest form of business to start.  As a sole proprietor, the business owner is said to be self-employed and is responsible for all duties related to running the business.  The sole proprietor will secure capital, establish and operate the business, and personally assume all risk and liability associated with the business.

The major advantage of the sole proprietorship is freedom and ease of startup.  To open your business as a sole proprietor, you only have to register your business name and you can open your doors.  You are not required to file annual reports with the government or maintain extensive records.

The major disadvantage is personal liability.  As a sole proprietor, you and your business are the same person for legal and tax purposes.  This means that any debt or obligation owed by the business is a personal debt or obligation owed by you, the sole proprietor.  As a result, anyone owed money by the business can go after your personal assets (house, car, personal savings) to be repaid.

Other advantages:

  • low startup costs and low maintenance costs
  • owner is the decision maker
  • all the profits go directly to the owner
  • possible tax advantages (consult with an accountant)

Other disadvantages:

  • no continuity of the business (if the owner leaves, business ceases to exist)
  • harder to raise capital
  • your business name is not protected

Conclusions: A sole proprietorship is quick and easy to get started but does not offer the flexibility or potential for long-term growth.  It is a good choice for industries with low-risk of liability that offer services to individuals and do not hire employees, rent office space, or enter into contracts with suppliers and customers.  A sole proprietorship can always be incorporated at a later date if the business continues to grow.


A general partnership is when two or more individuals combine resources with the intention of making a profit.  Like a sole proprietorship, it is relatively easy to set up and there are no filing requirements.  The general partners share in the management of the business and also assume personal responsibility of all the debts and obligations of the business.  With a general partnership, a partner will be liable for the entire value of any liability the business incurs, not just the portion allocated to his or her percentage of ownership.

A limited partnership limits liability for certain partners but requires compliance with filing requirements of the Partnership Act.  A limited partner will only be liable for the debts and obligations of the general partners to the extent of his or her ownership in the business.  In this structure, at least one partner must be a general partner with no limits on liability.  A partnership agreement will be necessary to define the ownership interests of general and limited partners.  A partner may be a general partner and a limited partner at the same time.

A limited liability partnership allows the partners to limit individual liability while still running the business as a partnership. In a limited liability partnership, each partner is liable only for his or her own liabilities, not those of the other partners.  A partner is only liable for the acts of another partner if there is negligence or wrongdoing.  Like a corporation, it requires registration with the BC registrar of companies and annual reports.  Unlike a corporation, the limited liability partnership is not subject to the management requirements that a company must follow.

Advantages of partnerships:

  • can be easy to form with low start up costs (general partnership)
  • more investment capital available compared to a sole proprietorship
  • limited regulation and reporting duties
  • broad management base
  • costs and profits are shared


  • unlimited liability (with a general partnership)
  • divided authority for decision making
  • difficult to raise additional capital
  • partners can legal bind each other without approval
  • no continuous existence of the business
  • no name protection
  • potential for conflict between partners is high
  • potentially high start-up costs if all partners seek independent legal advice in negotiation and drafting partnership agreements

Conclusions: A general partnership can be a simple but risky business venture if there is no written agreement outlining the terms of the partnership.  However, a partnership agreement is a private agreement that can be tailored to fit individual needs without the extensive record keeping and reporting requirements of a corporation.  Individuals considering this business structure should seek legal advice to protect individual interests and understand the liability he or she may be exposed to by joining a partnership.


When a business is incorporated, it becomes a “legal person” and acquires the powers of an individual that are separate and distinct from those of the individual shareholders. The corporation can enter into contracts, borrow money, sue and be sued, and pay taxes.  Ownership of the corporation is in the hands of shareholders, who appoint directors and officers to run the day-to-day operations of the company.

The major advantage of a corporation is ‘limited liability’.  Because a corporation is it’s own “legal person”, the corporation, not the individual shareholders, assumes liability for the acts of the business.  This means that generally shareholders will not be personally liable for debts, obligations or acts of the corporation.  However, there are certain circumstances when shareholders may be found personally liable for the actions of the company.

Other advantages:

  • shares are easily transferrable so the existence of the company does not depend on certain members maintaining ownership
  • small business tax rates may be lower than individual rates.
  • easier to raise capital by selling more shares or share options
  • there are clear rules for the roles of the people who control and operate the company
  • a corporation can own (be a shareholder) of other corporations which further limits and protects individual liability
  • when a business is incorporated, the name is protected from use by any other business


  • a corporation is required to maintain detailed records and report annually to the government
  • depending on how the shareholders get paid, it could result in getting taxed twice (consult an accountant for tax implications)
  • it is more complicated to take money out of the corporation to pay yourself, and payouts have tax consequences
  • the most expensive form of business to operate
  • in some cases, individual shareholders, directors, and officers of a company can be found liable for the acts of the company

Conclusions: If set up properly, a corporation can be a good tool to allow for change and growth as your company develops.  This business structure is appropriate for industries that have a higher exposure to liability, need outside money to grow, or hire employees and contractors to run part of the company.  There is a certain level of government regulation but individual liability is reduced to a minimum.

For more information and legal advice about selecting a business structure, please visit