A Unanimous Shareholders Agreement is one of the more complex agreements that exists in corporate law. The negotiation of the agreement requires shareholders to determine in advance and clearly set out in a contract how they intend to operate the business, make decisions and deal with events such as death, disability, bankruptcy, take-over offers and shareholder disputes.

What makes these agreements complex is that there is no “right” answer – the agreement needs to reflect the business intentions and business realities of the parties involved. Also, shareholders do not know in advance which side of an issue they will be sitting on. So at the time of negotiation, they don’t know whether they will be using the agreed upon provisions to their advantage or if other shareholders will be using the provisions against them.

This article details some common components of a unanimous shareholders agreement. The article is intended as general background information and not as specific advice for your legal situation. If you require assistance with drafting or negotiating a unanimous shareholders agreement, please contact Cameron Business Law.

  1. 1.Business Decisions and Corporate Governance

Under the Business Corporations Act (Ontario) and the Business Corporations Act (Canada), a board of directors makes decisions for a corporation. In order for the board of directors to pass a resolution approving a certain action, the resolution must receive the approval of a majority of directors. Shareholders generally are not involved in making decisions except in certain major decisions that are specified under the applicable law.

However, there are many situations where these basic rules do not fit the relationship of the parties. Sometimes shareholders would rather that a decision be made only with greater (or unanimous) approval from the board of directors. In other situations, shareholders would like to take on greater decision-making authority and have greater access to corporate information.

For example, shareholders may want all resolutions to be unanimous so that a shareholder cannot be disenfranchised. A shareholder who does not intend to be a director (such as a silent investor) may want to take away some or all of the power of the board of directors to make decisions and give the decision-making power to the shareholders. A minority shareholder may want assurances that the majority shareholder cannot ignore his/her opinion. Alternatively, a majority shareholder may want to ensure that a minority shareholder cannot unnecessarily impede the decision-making process.

A unanimous shareholders agreement permits the shareholders to modify the decision-making structure in a wide variety of ways. If the shareholders do not find the basic rules under corporate law to be acceptable, it is essential that they enter into a unanimous shareholders agreement setting out any necessary special provisions.

  1. 2.Issuance of Shares

Once a corporation has been set up, shareholders are often concerned about how to maintain their interest in the corporation and how to prevent undesirable third parties from joining the corporation. Take the example of three people starting a corporation. Each person buys twenty-five shares, so they each own a third of the corporation. If a fourth person were to buy twenty-five shares, each shareholder would now only own a quarter of the corporation. The result is that the original shareholders’ equity has been diluted. Now imagine that this new fourth shareholder has vastly different views on how to operate the corporation. Disagreements could ensue and the business itself could be derailed. To prevent these problems, unanimous shareholder agreements often place controls on how and when shares may be issued.

  1. 3.Future Financing

A unanimous shareholders agreement can deal with how future financing is to be obtained. Will the corporation approach banks and traditional sources of financing first? Will the shareholders agree to give personal guarantees if a bank requires them? What if no financing is available from a bank? Will the shareholders loan future funds? All of these questions can be addressed in a unanimous shareholders agreement. And if the shareholders intend to make shareholder loans to the corporation, they may wish to include a provision in the agreement regarding making such loans and the conditions upon which the loans will be made.

  1. 4.Death, Disability, Insolvency

Shareholders will often agree that when a shareholder dies, becomes disabled for a certain period of time or becomes insolvent, the other shareholders or the corporation will buy his/her shares.

However, this raises two further problems:

  1. How do you calculate the purchase price?

The purchase price of a common share in a corporation is usually based on a proportion of the current value of the business. For example, if a shareholder owns fifty percent of the shares of the corporation, the value of the shares would likely be equal to fifty percent of the value of the corporation.

But there is no single method to determine the value of a corporation, and the best method will often depend on the corporation’s type of business and any special circumstances that may exist. For example, a real estate holding corporation might be valued by the market value of assets (i.e. the real estate), while an operating corporation may be better valued based on cash flow or earnings. Different methods of valuation can give widely different results for the same business. Possible solutions are to require an independent valuator be retained or to require a pricing formula be employed. The advantage of retaining a valuator is that a valuator is able to provide a specific and customized evaluation of your corporation. The advantage of employing a pricing formula is that it is quick, certain and (usually) cost effective. However, formulas generally will not take into account any special features of your corporation and the results can be skewed by non-normal events. For example, if you have just landed a very large customer, a value based on past earnings may not represent the current value of your corporation.

  1. Where is the money coming from?

Once you have determined the method of calculating the purchase price, an important practical question is how will the purchase price be funded? The corporation or the shareholders may have difficulty obtaining cash in a short time frame to pay the purchase price if a shareholder dies. As well, corporations can only repurchase their shares if they meet certain solvency requirements. Having the shareholders take out life insurance and critical injury insurance (or having the corporation do so for all shareholders) is a potential solution, but this solution can have tax implications that must be addressed in consultation with your accountant.

  1. 5.One Shareholder Selling Shares

At some point, a shareholder may want to sell shares to a third party or a shareholder may be approached by a third party interested in buying his/her shares. Often the existing shareholders do not want a third party whom they haven’t dealt with to join the business. The unanimous shareholders agreement should set out provisions for how to deal with a potential sale. Two possible solutions are:

  1. Right of First Offer

If a shareholder is considering finding a third party buyer for his/her shares, a Right of First Offer requires that the shareholder make an offer to the other shareholders first. If the shareholders do not wish to purchase the shares, that shareholder is free to sell them to any other person so long as the terms of sale are the same as presented to the other shareholders.

  1. Right of First Refusal

A Right of First Refusal is similar to a Right of First Offer. In a Right of First Refusal, the third party makes an offer, which is then provided to the other shareholders and they have the option to buy the shares on the same terms. If the shareholders do not wish to match the offer, the shareholder is free to sell to the third party.

The distinction between Right of First Offer and Right of First Refusal may seem subtle but it has important consequences. A Right of First Offer is generally more advantageous to a selling shareholder as he/she can get the approval process out of the way and ensure that the unanimous shareholders agreement doesn’t slow down the sale transaction.

A Right of First Refusal is generally more advantageous to the non-selling shareholders as they are able to consider whether they want the potential buyer as a future business partner or would prefer to buy the shares themselves.

For any shareholder who wants to more securely lock in his/her business partners to the shareholders agreement, it is generally more desirable to have a Right of First Refusal. Another person may be discouraged from making an offer as they risk wasting time and money in making an offer that the other shareholders might match.

Another provision that may be useful is a “Tag Along” or “Piggyback” provision – if a key shareholder or majority shareholder receives an offer for shares, another shareholder may want to leave at the same time. A tag along or piggyback provision would only permit the purchase if the third party agreed to buy the tag along shares as well.

  1. 6.A Takeover Offer

Similarly, shareholders should consider what would occur if a third party made an offer to buy all of the shares owned by all of the shareholders (a “Takeover Offer”). How will shareholders make a decision on whether all shareholders will sell their shares? Some shareholders may want to make the sale; others may believe that the purchase price is insufficient or that more money could be made through operations. If the decision must be unanimous, a minority shareholder (who stands to gain little on the sale) could refuse to agree to sell unless he/she receives a premium. If the decision requires a majority, what level of majority?

The provisions dealing with this issue are usually called “Carry Along” provisions (or, a little more aggressively, “Drag Along” provisions). These provisions set out what happens when a shareholder or the corporation receives a takeover offer and what level of shareholder approval must be met in order for the offer to be accepted.

  1. 7.Buy-Sell Provision / Shotgun Provision / Russian Roulette Provision

A “Buy-Sell” provision is a fairly draconian dispute resolution provision. It is usually seen in a 50/50 ownership situation (although I have seen modified forms in other ownership situations). Essentially, one shareholder offers to buy all of the other shareholder’s shares at a certain price. If that shareholder does not agree to sell, he/she must buy the offering shareholder’s shares at the same price. This type of provision provides a last resort for shareholders who can no longer work together. There is a risk associated with the offer (resulting in the more colourful colloquial names “Shotgun” provision or “Russian Roulette” provision).

While on the surface a buy-sell provision seems fair as the same price applies whether there is a purchase or a sale, it must be used with caution. If one shareholder has greater financial resources than another, the wealthier shareholder may be able to take advantage of the other by making an offer at a strategic time.


As mentioned earlier, unanimous shareholders agreements are some of the more complex documents to draft and negotiate. There is no “standard form” agreement and they are often lengthy and complex. This article has provided a short synopsis of some of the considerations involved in drafting and negotiating a unanimous shareholders agreement, but there are a variety of other issues that may need to be addressed, including dispute resolution, non-competition provisions, confidentiality provisions or even employment provisions. As well, there are a number of taxation issues that should be discussed with your accountant.

After establishing your unanimous shareholders agreement, it is a good practice to revisit your agreement from time to time to confirm that it still represents the relationship of the parties and the agreement between the parties. In particular, you should periodically discuss the valuation method in the unanimous shareholders agreement with your accountant to ensure that it still provides a fair valuation of your corporation.

If you’d like further information about how a unanimous shareholders agreement may be useful to you or if you require assistance in drafting or negotiating a unanimous shareholders agreement, please do not hesitate to contact Cameron Business Law.