Do I need a shareholder agreement?

Why founders sign one

When two or more people own a company, the questions that cause disputes are predictable. What happens if a co-founder stops working on the business but keeps their shares? Who can approve a new investor, a big hire or a sale? Can a shareholder sell their shares to anyone they like?

Neither the Ontario nor the federal corporate statute requires a shareholder agreement. Without one, these questions are governed by the statute’s default rules and your articles and by-laws, which weren’t written with your company in mind. A shareholder agreement lets the founders decide the answers in advance, while everyone still agrees.

What it usually covers

A founder-stage shareholder agreement typically covers how the board is made up and which decisions need shareholder approval. It covers what happens to shares when a founder leaves, often tied to vesting. It also covers restrictions on selling or transferring shares, rights of first refusal, and what happens if the company is sold, including drag-along and tag-along rights. Most also include confidentiality, IP ownership and a process for resolving deadlock.

Transfer restrictions matter for another reason too. Many startups raise early money under Ontario’s private issuer exemption in section 73.4 of the Securities Act. To rely on it, a company’s securities must be subject to transfer restrictions in its articles or a securityholders’ agreement, under the definition in section 2.4 of National Instrument 45-106.

Unanimous shareholder agreements

A unanimous shareholder agreement is a particular kind of shareholder agreement, signed by all shareholders, that can restrict the powers of the directors. Both the Ontario Business Corporations Act (section 108) and the Canada Business Corporations Act (section 146) recognize them.

That has a real consequence. To the extent the agreement takes powers away from the directors, the shareholders take on the directors’ rights, powers, duties and liabilities, and the directors are relieved of them to the same extent. Under both statutes, someone who later acquires shares is treated as a party to the agreement (OBCA s. 108(4); CBCA s. 146(3)). It’s a useful tool, but founders should know which kind of agreement they’re signing.

When to sign it

The usual time is at incorporation, or as soon as there is more than one shareholder. Before there’s money, traction or tension, founders tend to agree easily. Early investors will also expect to see one, and it is one of the first documents they review.