Is a share buyer bound by a shareholders agreement they were never shown?

A buyer of shares steps into the seller’s place as a shareholder, and that can include a shareholders agreement nobody mentioned. The corporate statutes address the problem for one kind of agreement, the unanimous shareholder agreement. Under the federal Act, that is a written agreement among all the shareholders (and sometimes others) that restricts, in whole or in part, the directors’ powers to manage the business. These rules come from corporate law, so they differ by jurisdiction. This page covers the federal Act, Ontario and Alberta.

The federal and Ontario rules

Under the Canada Business Corporations Act, a purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party (s.146(3)). If no notice of the agreement was given, they may rescind the purchase no later than 30 days after they become aware of it (s.146(4)). In Ontario, the OBCA deems the transferee a party whether or not they knew (s.108(8)). A purchaser for value without notice, whose transferor’s share certificate (if any) did not refer to the agreement, may send the corporation and the transferor a notice of objection within 60 days after actually receiving a complete copy. They may then rescind, or demand that the transferor pay the fair value of the shares (s.108(9) and (10)).

Alberta uses a different route

Alberta’s Business Corporations Act also deems the person a party (s.146(3)). A protected purchaser, as defined in the Securities Transfer Act, who had no actual knowledge and whose transferor’s certificate carried no reference to the agreement, may send the corporation a notice of objection within 30 days after acquiring actual knowledge (s.146(4)). That person is then entitled to be paid the fair value of the shares by the corporation (s.146(5)). Under s.146(9), a unanimous shareholder agreement may exclude all, but not part, of s.146, so read the agreement itself. Other provinces run their own Acts, so check the one that governs the company.

What staying in means

The CBCA says that, to the extent such an agreement restricts the directors’ powers, the parties given that power have the rights, powers, duties and liabilities of a director (s.146(5)). Alberta (s.146(7)) and Ontario (s.108(5)) say similar things. These sections cover unanimous agreements only. For any other agreement, ask a lawyer whether you are bound.

• Ask the seller for every shareholders agreement and amendment, in writing, before you sign.
• Ask for a statement in the purchase agreement that no other agreement affects the shares.
• Check the transfer terms, including consent and first-refusal rights, in the agreement itself.

The glossary entry on the shareholder agreement gives the plain definition, and the answer on asset sales and share sales shows why a share buyer inherits more.