Shareholders' agreements in BC: what they cover and when you need one

If you own a BC company with one or more other people, a shareholders' agreement is the document that says what happens when you disagree, when someone wants out, or when an owner dies. It is easy to put off while the business is new and everyone gets along.

This article explains what a shareholders' agreement usually covers, when you need one, how BC's Business Corporations Act deals with what federal law calls a unanimous shareholder agreement, and where owners stand if things go wrong without one.

What a shareholders' agreement does

Every BC company has articles: its internal rules on matters such as how directors are appointed and how shares are issued and transferred. Articles are often adopted in a generic form at incorporation, and they say nothing about your particular arrangement with your co-owners. A shareholders' agreement is a contract among the shareholders that fills that gap. It records what you have agreed about control, money, exits and disputes, and it binds everyone who signs it.

If you are still at the incorporation stage, our article on when incorporating in BC makes sense explains why ownership questions are easiest to settle before a co-owner arrives, rather than after the first serious disagreement.

When you need one

• More than one owner. Two equal owners are the classic case. With a 50/50 split neither can outvote the other, so a single disagreement can stall the company.
• Before taking investment. An investor will want rules on control, information and exit. It is easier to set them on your own terms than to adopt the investor's under time pressure.
• Bringing in a key employee or family member. Decide now what happens to their shares if they leave or the relationship ends.
• Buying into a business with others. If you are acquiring a company alongside partners, the agreement is part of the deal. Our guide to the legal steps in buying a business in BC covers the wider process.

What a shareholders' agreement covers

Decision-making and deadlock

Which decisions need unanimous approval or a set majority (selling the business, borrowing above a set amount, issuing new shares, admitting a new shareholder), who sits on the board, and what happens when the owners are deadlocked: a casting vote, mediation, or a mechanism that lets one owner buy the other out.

Share transfers and right of first refusal

Limits on selling or pledging shares, usually with a right of first refusal: an owner who wants to sell to an outsider must first offer the shares to the existing shareholders on the same terms. Tag-along and drag-along rights deal with a sale of the whole company, protecting minority owners and stopping a single holdout from blocking a sale.

The shotgun clause

A shotgun clause lets one owner name a price per share; the other must then either buy at that price or sell at that price. It encourages a fair offer, but it favours the owner with ready access to cash, so it needs care where the owners' finances are unequal.

Buy-sell on death, disability or departure

Without an agreement, a deceased owner's shares pass to their estate, and the surviving owners may find themselves in business with an executor or with family members who have never worked in the company. A buy-sell clause sets out who must buy, who must sell, how the price is fixed and how it is paid, often with the help of life or disability insurance. The same questions arise when an owner retires, can no longer work, is dismissed, separates from a spouse or becomes bankrupt.

Each owner's will should line up with these terms. If an owner dies without a will, the shares are distributed under BC's intestacy rules, which our article on dying without a will in BC explains.

Funding

Whether owners must put in more money if the company needs it, the terms on which shareholder loans are made and repaid, and what happens to an owner who will not or cannot contribute. Dividend policy belongs here too.

Non-competition and confidentiality

Promises not to compete with the company or solicit its clients and staff, both while an owner and for a period after leaving. These need careful drafting, because restrictions that go further than the business genuinely needs risk being unenforceable.

Dispute resolution

A route for resolving disagreements privately, commonly negotiation, then mediation, then arbitration, before anyone goes to court.

Unanimous shareholder agreements in BC

You may come across the term "unanimous shareholder agreement". It comes from the federal Canada Business Corporations Act, which recognizes a written agreement among all the shareholders that restricts the directors' powers to manage the company.

BC's Business Corporations Act takes a different route. Under section 137, a company's articles may transfer some or all of the directors' powers to manage or supervise the business to one or more other persons, such as the shareholders. The transfer is effective only if the provision was in the articles from the start or was added by special resolution (usually two-thirds of the votes cast, unless the articles set a higher majority, or the written consent of all voting shareholders), and only if it clearly shows the intention to transfer the powers. Whoever receives the powers also takes on the directors' rights, duties and liabilities to that extent, and the directors are relieved of them to the same extent.

In practice, a BC shareholders' agreement that is meant to take decisions away from the board needs matching changes to the articles, and owners who take on those powers should understand that responsibility comes with them.

If things go wrong without an agreement

Without an agreement, co-owners fall back on the articles and the Business Corporations Act. A shareholder who is being shut out can apply to court under section 227, often called the oppression remedy, on the ground that the company's affairs are being conducted, or the directors' powers exercised, in a way that is oppressive, or that an act or resolution is unfairly prejudicial to them. The court has wide powers, including ordering the company or another shareholder to buy the applicant's shares, or ordering the company liquidated and dissolved.

A court application is expensive, its outcome is uncertain, and it usually comes after the relationship has broken down. A shareholders' agreement lets you decide the exit terms while everyone is still on good terms.

Co-own a BC company? Settle these questions while everyone still agrees

Our business lawyers can prepare or review your shareholders' agreement, make sure it fits with your company's articles, and coordinate the buy-sell terms with each owner's estate plan.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.