I am often asked this question. It sounds like a yes/no question, but the answer is not always that straight forward. To answer the question, a few gating issues need to be considered first:
- Are you a minority shareholder looking for protections?
- Are you a founding shareholder looking to assert more controls than the company’s governing statute offers?
- Are you an investor looking to assert managerial controls in addition to protecting your investment?
The last is the easiest. Yes. Such an investor will want to ensure that their investment is carefully protected both on a corporate/ownership level but also from the perspective of being involved in the day-to-day operations of the company’s business and affairs. Such investors will assert the right to have a member (or members) of its ranks elected as a director of the company and appointed as an officer too. In some cases, the investor will look to control the board by having the right to nominate a majority of the board’s members for election.
The first is also ‘yes’. A typical (if there really is such a thing!) shareholders’ agreement provides minority shareholders’ with certain protections that are not otherwise provided by the governing statute alone. For example, shareholders’ agreements will often prohibit the company from issuing additional shares or otherwise diluting the issued capital of the company without first obtaining the consent of the shareholders at some pre-determined threshold – most usually a super-majority of the voting shares (e.g. 75%). The corporate statutes in Ontario do not provide this protection. While such consent seldom requires unanimous approval of the shareholders and therefore cannot protect all minority shareholders in all situations, it can offer some comfort to certain minority shareholders in the right circumstances.
The second is the most complicated. Shareholder agreements will typically include provisions that allow the holders of a certain majority of the shares to force the minority shareholders to sell their shares into an acquisition transaction even if the minority shareholder otherwise objects to the terms of the proposed transaction (the corporate statutes in Ontario do not provide this right). However, as above, they also typically impose limitations and restrictions on the majority shareholders that can impact the majority in ways the majority may feel is contrary to their interests.
That said, in each case, it’s important to carefully balance the rights you’re looking to obtain with the obligations and limitations to which you will be subject when you are considering whether or not to put a shareholders’ agreement in place.