How should a shareholder agreement handle an owner’s exit?

A shareholder agreement can say in advance what happens when an owner leaves. Corporations Canada’s guide to shareholder agreements describes the main exit tools. Such an agreement must be in writing and signed by the shareholders who are party to it, and it is specific to each corporation, so what follows is a list of questions to settle, not a template.

Who gets the first chance to buy

Corporations Canada describes a right of first refusal as a term under which a shareholder who wants to sell must first offer the shares to the other shareholders before selling to an outside party. It also notes that transfers must conform to any conditions or restrictions that apply to the corporation’s shares, for example a requirement that directors approve all transfers. Check whether your articles already contain a restriction and whether the agreement adds to it.

Events that trigger a sale

Corporations Canada says an agreement can set rules for the transfer of shares when events occur such as the death, resignation, dismissal, personal bankruptcy or divorce of a shareholder. It gives the example of requiring the shares to be transferred to the remaining shareholders or the corporation, often at fair market value, and adds that operators of small corporations with such a provision sometimes buy life insurance to fund the purchase. Decide which events count, who may or must buy, how the price is set and how it is paid.

What a departing owner may do afterwards

The same guide lists non-competition clauses, confidentiality agreements and dispute resolution mechanisms among other possible provisions, along with how the agreement itself is amended or terminated. BDC describes a non-compete covenant in a purchase agreement as a promise not to take part in a competing business for a number of years after closing. Whether a restriction on a departing owner can be enforced is a legal question, so have a lawyer review the wording.

Check which statute governs the corporation

Corporations Canada’s guide describes shareholder agreements under the federal Canada Business Corporations Act. A provincially incorporated corporation is governed by its own province’s statute, and the rules can differ. Ontario’s Business Corporations Act, for example, provides in s.108(2) that a written agreement among all the shareholders, or among all the shareholders and one or more persons who are not shareholders, may restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of the corporation. Confirm where your corporation is incorporated before relying on a federal guide. For a wider view of leaving a business, see what are my options for exiting my business.