Many of our business-owning clients ask that we prepare a Unanimous Shareholder Agreement (“USA”), but when asked what they want to accomplish through a USA, they are not entirely sure.
A USA can be a useful tool in creating certainty for the shareholders of a privately held corporation. A well drafted USA will typically include dispute resolution provisions, details regarding the number of votes required to pass certain decisions, a mechanism for determining the value of the shares of the company, and other items relating to the ownership and strategic direction of the business.
One of the often-overlooked purposes of a USA is to provide clarity regarding the rights and obligations of the shareholders in the event that a shareholder is subject to an “involuntary transfer”. An involuntary transfer is an event by which a shareholder will lose the ownership or voting control of their shares. There are typically four events that are defined as involuntary transfers, each with their own particular set of issues:
- Death – The shareholder’s shares will pass in accordance with their Will. The beneficiary named in the shareholder’s Will could be their spouse, parent, or even their 18 year old child.
- Disability – The shares will continue to be owned by the shareholder but if the shareholder has become incompetent, their Attorney or court-appointed Trustee will manage the shares.
- Divorce – Some or all of the shareholder’s shares may be awarded and transferred to their former spouse as part of a division of matrimonial property.
- Bankruptcy – If a shareholder becomes bankrupt, a trustee in bankruptcy will be appointed to manage and even liquidate the shareholder’s assets.
In all of these circumstances, someone other than the original shareholder may obtain ownership and/or or control of the shares. The new shareholder, or decision maker for the shareholder, could have the ability to unilaterally appoint directors, decide on large spending, and have significant control and power over the direction of the company.
In a publicly traded corporation (eg: Telus, Royal Bank of Canada or Encana) it does not matter who owns or controls the outstanding shares of the corporation, since the average shareholder is not in any way involved in the business. However, in a corporation with only a few shareholders, and particularly where the shareholders are also actively involved in working in and on the business, it is of critical importance that only persons approved by the other shareholders of the corporation may own or control the shares of the corporation.
A USA should deal with what happens to the shares of a shareholder who experiences an involuntary transfer, such as:
- The corporation can repurchase or redeem the shares of the shareholder experiencing the involuntary transfer;
- The other shareholders may be given the opportunity to purchase the shares of the shareholder experiencing the involuntary transfer; or
- If the new person acquiring the shares is deemed suitable by the other shareholders then they can approve the transfer of shares to such person, for example, if a shareholder dies and leaves the shares to a child but the child has been working productively in the business for years.
The circumstances of each company and its individual shareholders is unique, and there is no one right way to deal with involuntary transfers or other matters that may be set out in a USA. Business owners and their advisors such as lawyers, accountants and financial advisors can create a custom USA that will provide certainty for the business.