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PRB 99-32E

Canada Business Corporations Act: Unanimous Shareholder Agreements

Penny Becklumb
Industry, Infrastructure and Resources Division

Revised 3 November 2008

PDF (74 Kb, 9 pages)

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Contents


Introduction

Under the Canada Business Corporations Act (CBCA), a unanimous shareholder agreement (USA) is an agreement that is among all the shareholders of a corporation and that restricts the powers of directors to manage, or supervise the management of, the business and affairs of the corporation.

USAs give shareholders of closely held corporations a measure of flexibility in shaping the internal organization and affairs of the corporation. The USA provision was considered innovative when it was first included in the CBCA in 1975, because it overrode the common law rule that shareholders, even when acting unanimously, could not fetter the discretion of directors.(1)

Many provincial business corporations statutes also provide for unanimous shareholder agreements, but such provisions may vary considerably from that included in the CBCA. This paper provides an overview of the CBCA provision.

Contents of the CBCA Provision

The USA provision is found in section 146 of the CBCA. It provides for the following matters.

A. Creation and General Description (sections 146(1) and (2))

A USA is a written agreement among shareholders that fulfills legal requirements relating to contracts. A USA restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation. If an agreement does not restrict the directors’ management powers, it is not a USA as described in this paper, even if it is a unanimous agreement among the shareholders. A USA could potentially wholly restrict the management powers of the directors. Even in such a situation, the CBCA does not permit the board of directors to be eliminated.

Being “unanimous,” a USA must be among all the shareholders of the corporation. One or more persons who are not shareholders may also be parties to a USA. If the corporation has only one shareholder,(2) that person may create a USA alone through a written declaration.

Since the use of a USA could lead to the “override” of some corporate law requirements, some jurisdictions have limited the use of USAs to corporations that have no more than a specified number of shareholders. The possibility of so limiting the CBCA provision was raised prior to the introduction of a significant set of amendments made to the CBCA in 2001;(3) however, no restriction was made. The continuing approach of simply requiring a USA to be unanimous is largely self-limiting because, once a corporation exceeds a certain number of shareholders, achieving unanimous agreement may be difficult.

While a USA is a contractual agreement among shareholders, it may also be considered a constating document (like the by-laws or articles) that deals with the internal governance of the corporation.(4) It has been described as a “corporate law hybrid, part contractual and part constitutional in nature.”(5) Various CBCA provisions that govern fundamental aspects of internal affairs of the corporation are explicitly made subject to the terms of any USA that is in place. For example, section 102, which requires the directors to manage, or supervise the management of, the business and affairs of a corporation, is subject to any USA. Similarly, the directors’ powers to make, amend or repeal by-laws of the corporation (section 103), and to appoint officers and specify their duties (section 121) are also subject to any USA.

The Supreme Court of Canada has described the USA provision as:

providing a mechanism by which the shareholders, through a unanimous agreement, [can] strip the directors of some or all of their managerial powers as desired by the shareholders. Rather than removing the directors from their positions, a USA simply relieves them of their powers, rights, duties, and associated responsibilities. This may be accomplished without specific formality … . [W]hat is in effect created is an “incorporated partnership” with statutory force.(6)

Accordingly, a USA may be used to transfer the role of the directors to the shareholders. One consequence of such a transfer is that shareholders, if acting unanimously, may effectively circumvent director residency requirements.(7)

B. Purchasers or Transferees (sections 146(3) and (4))

If shares that are subject to a USA are sold or transferred, the new shareholder is deemed to be a party to the USA. However, it is advisable to give notice of the USA to the new shareholder before that person acquires the shares. Notice may be given by including the USA with the security certificate or making conspicuous reference to it on the certificate (section 49(8)), or notice may be given in any manner that provides actual knowledge of the USA.

If notice of the USA is not given to the new shareholder, then within 30 days of becoming aware of the existence of the USA, the shareholder may rescind the transaction by which the shares were acquired.

C. Rights, Powers, Duties and Liabilities (section 146(5))

When a USA is in place, certain rights, powers and duties that the directors would otherwise have are transferred to the shareholders, to the extent set out in the USA. Prior to the amendments made to the CBCA in 2001, it was not clear whether shareholders who took on the directors’ powers under a USA were also subject to the related liabilities, or whether the directors continued to be so subject.

This was clarified by the 2001 amendments, which added wording to section 146(5) explicitly stating that when shareholders relieve directors of their powers, they also relieve them of the associated liabilities, whether they arise under the CBCA or otherwise. Defences related to these liabilities are also transferred to the shareholders.

The CBCA explicitly states an example of a director liability that may be transferred to the shareholders. Under section 119, directors may be liable to employees of the corporation for up to six months’ wages owed to employees. A USA may result in this significant liability shifting to the shareholders.

It is not clear upon what constitutional basis a CBCA provision may relieve directors of liabilities imposed on them by validly enacted provincial legislation.

D. Fettering Discretion of Shareholders (section 146(6))

As mentioned above, before the USA provision was included in the CBCA, the common law did not allow shareholders to fetter the discretion of directors. It was believed that directors needed freedom to fulfill their duties to the company. The USA provision changed that rule, specifically allowing the shareholders to enter an agreement to acquire directors’ rights, powers and duties.

However, this change made it possible to argue that the new USA provision did not supplant the old common law rule, but rather only displaced it to apply in respect of shareholders’ discretion rather than directors’ discretion. It became arguable that, when a USA was in place, shareholders were not allowed to fetter the discretion they had acquired from the directors for themselves.

The 2001 amendments corrected this potential problem. Section 146(6) of the CBCA now states that “[n]othing in this section prevents shareholders from fettering their discretion when exercising the powers of directors under a unanimous shareholder agreement.” In other words, shareholders may agree on how they will exercise the powers they have taken from directors under a USA.(8)

E. Compliance with a USA

As previously stated, a USA is both a legal contract and a constating document. Accordingly, it is legally enforceable. Section 122(2) states that directors and officers must comply with the terms of a USA.

There are at least four different legal means of enforcing a USA.

First, a complainant may seek to enforce a USA in court under contract law. Generally only parties to a contract may sue to enforce the contract. However, exceptions are made in certain circumstances.(9)

Second, under section 247 of the CBCA, a complainant may apply to a court for an order directing compliance with, or restraining a person from acting in breach of, a USA. The complainant under section 247 may be almost anyone, in the court’s discretion.(10) The defendant(s) may be “the corporation or any director, officer, employee, agent, auditor, trustee, receiver, receiver-manager or liquidator of a corporation.” If an application under section 247 is successful, the court may make any further order it thinks fit.

Third, under section 241 (the oppression remedy), a complainant(11) may apply to a court for an order on the basis that a breach of the USA is “oppressive or unfairly prejudicial to or … unfairly disregards the interests of any security holder, creditor, director or officer.” The court may make any interim or final order it thinks fit in connection with an oppression case, including an order restraining the conduct complained of, setting aside a transaction, compensating an aggrieved person, or even liquidating or dissolving the corporation.

Fourth, under section 214, a shareholder may apply for an order liquidating or dissolving a corporation, or any of its affiliated corporations, on the basis that a USA entitles the complaining shareholder to this remedy after the occurrence of a specified event, which has occurred.

In general, when enforcing a USA, a special rule applies in the case of the corporation itself, or a guarantor of an obligation of the corporation, seeking to assert non-compliance with a USA against a third party dealing with the corporation. Under section 18, the corporation or its guarantor may only do this if the third party knew about the USA, or ought to have known of the USA by virtue of the party’s relationship to the corporation.

Conclusion

A USA is an agreement that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation. Accordingly, it may be an effective and efficient means for minority shareholders to participate in the organization and affairs of a corporation. With creative drafting, a USA may provide great flexibility for shareholders to determine how the corporation will be structured and run.


Endnotes

*The original version of this document was prepared by Margaret Smith, formerly of the Library of Parliament.
  1. See Motherwell v. Schoof, [1949] 4 D.L.R. 812 (Alta. S.C.), and Atlas Development Co. v. Calof (1963), 41 W.W.R. 575 (Man. Q.B.).
  2. If applicable, the beneficial shareholder, and not the registered shareholder, is entitled to enter into a USA.
  3. This possibility was discussed in an April 1996, Industry Canada discussion paper entitled Canada Business Corporations Act: Unanimous Shareholder Agreements. Five years later the CBCA was amended by An Act to Amend the Canada Business Corporations Act and the Canada Cooperatives Act and to amend other Acts in consequence, S.C. 2001, c. 14 (Bill S-11).
  4. See Duha Printers (Western) Ltd. v. Canada, [1998] 1 S.C.R. 795.
  5. Ibid., para. 66.
  6. Ibid., para. 64.
  7. Under section 105 of the CBCA, generally at least 25% of the directors of a CBCA corporation must be resident Canadians.
  8. J. Anthony VanDuzer, The Law of Partnerships and Corporations, 2nd ed., Irwin Law, Toronto, 2003, p. 248. See also section 145.1.
  9. For a discussion of the doctrine of principled exception to the privity of contract doctrine, see Fraser River Pile & Dredge Ltd. v. Can-Dive Services Ltd., [1999] 3 S.C.R. 108.
  10. As set out in section 238, “complainant” means (a) a security holder (present or former) of the corporation or any of its affiliates, (b) a director or an officer (present or former) of the corporation or any of its affiliates, (c) the Director (a public office holder appointed under section 260 of the CBCA to carry out duties set out in the CBCA), or (d) any other person who, in the discretion of a court, is a proper person to make the application.
  11. Ibid.

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