How should a shareholder agreement be drafted for a buyout group?

A buyout group is several people buying a business together, for example through one corporation. Their shareholder agreement governs how the group decides, how a member leaves and what happens when members disagree. A lawyer should draft it for the statute that governs the corporation. This page describes what the federal statute allows and what Corporations Canada says such agreements cover.

What the statute lets the agreement do

Under the Canada Business Corporations Act (CBCA), an otherwise lawful written agreement among all the shareholders (or all of them and one or more non-shareholders) that restricts, in whole or in part, the directors’ powers to manage, or supervise the management of, the business and affairs of the corporation is valid (s.146(1)). A purchaser or transferee of the shares is deemed a party (s.146(3)), and one who was not given notice may rescind the acquisition no later than 30 days after becoming aware of the agreement (s.146(4)). To the extent the agreement restricts the directors’ powers, the parties given those powers have all the rights, powers, duties and liabilities of a director (s.146(5)). Ontario’s Business Corporations Act has its own provision, s.108.

Decisions and deadlock

Corporations Canada says an agreement can require a higher level of shareholder approval than the CBCA does, for example unanimity for a sale of the business where the CBCA requires a special resolution. It also describes provisions giving each shareholder the right to sit on the board or nominate a representative, and lists dispute resolution mechanisms among other possible provisions. A group should settle who decides what, and what happens when members split evenly.

Entry and exit

Corporations Canada describes restrictions on share transfers, including a right of first refusal, and rules triggered by the death, resignation, dismissal, personal bankruptcy or divorce of a shareholder. It notes these provisions are complex and usually set out mechanisms to manage the transfer, such as notices and how the transfer price will be funded. If the corporation itself buys a departing member’s shares, CBCA s.34(2), subject to the exceptions in ss.35–36, bars the payment where there are reasonable grounds for believing the corporation is, or would after the payment be, unable to pay its liabilities as they become due, or that the realizable value of its assets would after the payment be less than the aggregate of its liabilities and stated capital of all classes.

Questions to settle first

Before a lawyer drafts anything, the group can agree on answers to these:

• Which decisions need every member, and which need a majority?
• Who can sell or transfer shares, to whom, and on what notice?
• How is a departing member’s price set, and who funds it?