Shareholder agreements

How BC law treats it

Under the Business Corporations Act, SBC 2002, c 57 (BCBCA), a shareholders agreement is a private contract. Unlike the federal Canada Business Corporations Act, the BCBCA has no statutory unanimous shareholder agreement regime. A BC shareholders agreement cannot by itself strip the directors of their powers or duties. If the shareholders want someone other than the directors to exercise management powers, the articles must provide for it under BCBCA s. 137, and the person who receives those powers takes on the directors' duties and liabilities. Because the agreement binds only the people who sign it, key terms such as transfer restrictions, special approval requirements and share class rights are often also written into the articles so they bind the company and future shareholders. Where the agreement and the articles conflict, the articles and the BCBCA govern the company, although the signing shareholders may still be liable to each other for breach of the agreement. Common terms include board nomination rights, a list of major decisions requiring unanimous or supermajority approval, rights of first refusal, tag along and drag along rights, a shotgun buy sell clause, buyout on death, disability or departure, valuation methods, non-competition and confidentiality, and dispute resolution, often by arbitration. A breach is enforced through contract remedies, and the agreement can shape shareholders' reasonable expectations in an oppression claim under BCBCA s. 227 (BCE Inc v 1976 Debentureholders, 2008 SCC 69).

What it means for your business

A shareholders agreement is the founders' plan for disagreement, departure and exit, written while everyone still gets along. Without one, a deadlock or a departing co-founder can freeze the company, and the only remedy may be expensive litigation. A well drafted agreement, aligned with the articles, gives a clear and fast route out and reassures investors and lenders that control is stable. Example: Two co-founders of a Vancouver SaaS company sign a shareholders agreement giving each a board seat, requiring unanimous approval for new share issuances, and including a shotgun clause. When they later disagree over strategy, one triggers the shotgun and the other buys her out within 60 days.

Risks and common mistakes

Relying on a CBCA style unanimous shareholder agreement to remove directors' powers in a BC company without amending the articles under BCBCA s. 137. Putting transfer restrictions only in the agreement and not in the articles, so they do not bind new shareholders. Using a shotgun clause between parties with very different financial resources. Failing to require new shareholders to sign a joinder agreeing to be bound. Leaving the valuation method for buyouts vague or undefined.