British Columbia Shareholder Agreements
This page outlines the law of shareholder agreements in British Columbia. If you have any questions, our lawyers can assist. Book an appointment online or call us at 604-628-2241 or fill out the form on the right of this paragraph.
It is common for two or more companies or individuals to decide to carry on business together, whether as partners, co-owners or shareholders of a company. Often it is advisable to define in advance the relationship between the parties and their respective obligations to the business and each other. It may be difficult to convince the parties that an agreement is necessary, but they will recognize the need the first time a dispute arises.
This page deals specifically with shareholders’ agreements, but many of the same principles apply for co-ownership agreements and partnership agreements. Whether the parties choose to be shareholders, partners or co-owners depends on tax and other considerations.
The following discussion reviews the model shareholders’ agreement (the “model agreement”) and the matters that might be addressed in such an agreement for a British Columbia company that is not a reporting issuer.
Conduct of the Affairs of the Company
The shareholders’ agreement should set out how the affairs of the company will be managed and who will make the decisions. These provisions will relate to the control of the company and the protection of any minority shareholders.
A shareholders’ agreement usually contains covenants relating to management of the company, including the following:
1) The number of directors and who may appoint and remove nominees to the board. The agreement may provide that each shareholder may appoint one nominee, but there may be circumstances where a shareholder will have the right to appoint more than one director or where the parties will agree to appoint a neutral or independent director to break any deadlocks.
2) The quorum for the transaction of business by the directors. The quorum may require a nominee from each shareholder to be present or may provide that a smaller number can transact business.
3) Where meetings are held, who can call them and the notice required.
4) Decisions the directors can make.
In any business, there will be certain important decisions that will require the unanimous or special approval of the directors or the shareholders. Examples include: making major capital expenditures; borrowing or granting security for capital expenditures; conducting non-arm’s length transactions; changing bank signing officers; approving budgets; entering into major or material contracts; acquiring or disposing of property; and issuing dividends and additional shares.
If shareholders will be running the business, the parties may wish to have separate employment or management contracts entered into between the company and those shareholders. Cross default provisions should be used to ensure that a default by a shareholder under his or her employment contract will trigger a default under the shareholders’ agreement.
Non-Competition, Non-Solicitation and Confidentiality Agreements
Often it is important that the shareholders agree not to be involved in competing businesses within the market area of the company’s business, either while they are shareholders or for a certain period of time afterwards. The clauses must be reasonable as to scope of activity, geographic area and time or they risk being found unenforceable as contrary to public policy. In the absence of any noncompetition covenants, employee shareholders may also be subject to fiduciary obligations that would prevent them from competing with the company. Similar covenants or agreements may be appropriate or necessary to deal with the nonsolicitation of employees, customers or suppliers, and the handling and treatment of confidential information.
Without the benefit of specific provisions in a shareholder agreement, the conduct of the management and the affairs of the company will simply be carried out in accordance with the Business Corporations Act and the company’s articles. Consequently, a majority of the shareholders will be able to elect a board of directors, who in turn will appoint the officers of the company.
Subject to various provisions in the Business Corporations Act, the directors will be free to manage and conduct the affairs of the company as they see fit. As each of the three shareholders in our assumed fact situation are “minority” shareholders, two of the three could, in the absence of a shareholders’ agreement, act together to elect only themselves to be board members, and they in turn could be appointed the only officers of the company. Arguably, they could also ensure that the company does not employ or distribute dividends or other distributions to the other shareholder. As none of the shareholders knows at the outset who may be the one left out, it is in the best interest of each to resolve this situation fairly. The model agreement allows for each shareholder to be a director or to nominate a director to a three person board. This ratio maintains the same relative voting power on the board as exists at a meeting of shareholders.
The model agreement also provides for a quorum of three at a board meeting: paragraph 3.03. This provision is consistent with the shareholders’ desire that a board meeting not be held without all the directors being present. Paragraph 3.04 ensures that one director is not able, through continued non-attendance, to stalemate the directors’ ability to manage and conduct the affairs of the company.
In regulating the conduct of the affairs of the company in a shareholders’ agreement, it is necessary to obtain the desired balance between protecting the interests of minority shareholders and hamstringing the efficient management of the company. The balance obtained in each situation will differ depending on the wants and needs of the particular shareholders and the company.
The model agreement contains an extensive list of the major decisions that can only be undertaken with a 75% majority vote of the directors. Where there are three directors, this in substance requires unanimous agreement. The list of major decisions considered in paragraph 3.05 of the model agreement leans heavily to the side of protecting the interests of minority shareholders while arguably running the risk of hamstringing the efficient operation of the company.
The list of major decisions in the model agreement may well be reduced once reviewed by the shareholders. However, it is usually better to start with an extensive list and cut, than to start with a short list and attempt to determine what has been omitted. Note that the shareholders’ agreement does not specifically contain the details of the employment or management agreements between the company and its shareholders. It is usually more appropriate to have these agreements separate from the actual shareholders’ agreement, although any amendments to employment or management agreements by the company are viewed as major decisions with the concomitant restrictions contained in paragraph 3.05 of the model agreement.
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