Share purchase agreement vs shareholders’ agreement

Both documents sit around a purchase of shares in a private company, so a buyer may ask whether they are alternatives. They are different kinds of contract. One moves shares from a seller to a buyer. The other sets out how the owners deal with each other and with the running of the company. This page uses the Canada Business Corporations Act (CBCA), which applies to federal corporations only. A company incorporated under a provincial statute is governed by that statute, so check the incorporating jurisdiction.

What a share purchase agreement is

A share purchase agreement is the contract by which a buyer acquires a company’s shares from its shareholders. In a share sale, the assets and liabilities of the company remain with that corporation, as the Saskatchewan Workers Compensation Board describes it, and BDC says that purchasing shares comes with a very different set of responsibilities compared to purchasing assets. BDC calls the representations and warranties the core of the purchase agreement and says they are all about risk allocation. It also lists indemnities among the agreement’s sections. Its parts include the following, the last three among the sections BDC describes in a typical agreement:

• The parties: the selling shareholders and the buyer
• Representations and warranties about the company
• Indemnities for what the sellers got wrong or left out
• Closing conditions, which BDC describes as undertakings the vendor agrees to complete before the deal closes

What a shareholders’ agreement is

A shareholders’ agreement is an agreement among the owners of a company about how it is run and how they relate to each other as owners. Under the CBCA, an otherwise lawful written agreement among all the shareholders, or among all the shareholders and one or more persons who are not shareholders, that restricts, in whole or in part, the powers of the directors to manage, or supervise the management of, the business and affairs of the corporation is valid. The Act calls it a unanimous shareholder agreement. Its effect on the board is built in: s.102(1) says that, subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.

Where the two meet at closing

The documents collide when the shares being sold are subject to a unanimous shareholder agreement. Under s.146(3), a purchaser or transferee of those shares is deemed to be a party to the agreement, whether or not the buyer signed it. Under s.146(4), if the buyer was not given notice that it exists, the buyer may rescind the transaction by which the shares were acquired, no later than 30 days after becoming aware of it. The 30 days is the statute’s own period. A sole owner can also carry one: under s.146(2), a written declaration by the beneficial owner of all the issued shares 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 deemed a unanimous shareholder agreement.

How they differ

• Function: the purchase agreement allocates risk between buyer and seller on one transaction; the shareholders’ agreement governs the owners’ relationship and, where it restricts the directors, how the company is managed
• Parties: the purchase agreement binds the sellers and the buyer; a unanimous shareholder agreement is among all the shareholders, and a later share purchaser is deemed a party under s.146(3)
• Source of its legal effect: the purchase agreement is an ordinary contract; the CBCA gives a unanimous shareholder agreement specific statutory consequences, including its place in s.102(1) and s.146
• Where the buyer finds it: under s.21(2), a shareholder is entitled on request and without charge to one copy of the articles, by-laws and any unanimous shareholder agreement; that right belongs to shareholders, so a buyer who is not yet one can ask the seller to produce it

Factors that decide which document matters

These are conditions to check, not a recommendation. If the target is incorporated under a provincial statute, the CBCA rules above are not the starting point, and that statute governs. If the deal is a sale of all the shares, the purchase agreement carries the allocation of risk, while an existing shareholders’ agreement still has to be located and read. If only some shares are sold, or the buyer is joining other owners, the continuing agreement may matter more to the buyer’s position. If an agreement exists and notice of it was not given, s.146(4) is engaged. If the seller is the only shareholder, ask whether a declaration under s.146(2) exists. Then read what the agreement says about transfers, valuation and exit. For how the closest related document works, see what a shareholder buy-sell agreement is. A lawyer qualified in the relevant jurisdiction can review both documents.