Corporations are creatures of statute. They exist and are governed by corporate legislation (see, for example, the Business Corporations Act (Alberta)).
Most people understand that there are certain rules and procedures that are associated with being involved with a corporation (as a shareholder, officer or director).
In addition to the applicable corporate legislation, rules and procedures are contained in a corporation’s “constating” which include a corporation’s articles, by-laws and, possibly, a unanimous shareholders agreement.
A unanimous shareholders agreement (USA) is, as the name suggests, is an agreement between all shareholders of a corporation.
The principle purpose of a USA is to restrict the powers of the directors to manage, or supervise the management of, the business and affairs of the Corporation. Often though, the scope of a USA reaches beyond this principle purpose to cover other shareholder relationship matters.
Essentially, USAs serve as the rule book for interactions among the corporation and its shareholders.
In addition to restricting the powers of the directors, it used to define shareholders rights and obligations and govern shareholder behavior visa vie the corporation.
Generally speaking, USAs typically contain provisions that relate to: (i) governance (decision making); (ii) share ownership (transfers and issuances including pre-emptive rights, drag and tag along rights and shotgun provisions); (iii) purchase rights on the occurrence of specified events (death, incapacity, divorce, bankruptcy, termination of employment, etc…) (iv) confidentiality, non-solicitation and non-competition provisions; (v) capitalization and financing matters; and (vi) dispute resolution mechanisms, among others.
These types of provisions are often beneficial in circumstances where a closely held corporation is owned by two or more shareholders.
This is especially the case in the early stages of establishing a corporation as it clarifies shareholder expectations which should have the effect of reducing the likelihood of future shareholder disputes, or at least provide a mechanism for addressing a dispute, should one arise.
So, the question needs to be asked…is there any downside to having a USA?
First of all, there is the issue of cost. Often, in the initial stages of forming a corporation, the costs of preparing a USA may exceed the utility of having one.
After all, if the corporation is not worth anything, it my not make economic sense to incur legal fees on this type of document. The realities of starting a new business may dictate that while a USA is a “nice to have” scarce resources may have to be allocated elsewhere.
That being said, shareholders of closely held corporations should regularly revisit whether a USA would be beneficial. There may be a time when the having one is well worth the cost and the earlier the better.
Negotiating when there are no issues between shareholders is always easier. Waiting until after a dispute develops may make negotiation far more challenging…if not impossible.
Secondly, shareholders will want to keep in mind that they will become liable (in the same manner as a director) to the extent they have assumed the powers and responsibilities associated with directors.
As mentioned previously, the principle purpose of a USA is to restrict the powers of the directors. Shareholders become liable to the extent they assume any such powers. Needless to say, shareholders will want to exercise caution in doing so.
Seeking new investors
Finally, the existence of a USA may hamstring a corporation’s ability to seek new investors.
Often new investors will not appreciate the existence of certain provisions often contained in USA’s which may serve as an impediment to attracting future investment.
Understanding your corporation’s future capital funding requirements is an important consideration in determining whether to proceed with a USA.
Despite these disadvantages, USAs can serve an important function in ensuring there is clarity among a corporation’s stakeholders.
More often than not there is a strong argument for the use of a USA by shareholders of a closely held corporation.
By clearly establishing the “rules of the game” when it comes to matters concerning a corporation, USAs often same money, time and frustration in the long run.
With this in mind, you will want to consider whether a USA is right for your corporation. This is typically not a “do it yourself” task and consulting with a qualified legal counsel in highly recommended.
If you have questions or would like to discuss whether a USA is right for your company, reach out to us at email@example.com.