Shareholder Agreements – Issues and Considerations in Drafting and Approach

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Article2013 | 04 | 17

Shareholder Agreements – Issues and Considerations in Drafting and Approach


The content of this paper is concerned primarily with small business corporations with fewer than ten shareholders. As such, matters typically related to larger entities such as foreign ownership and securities regulation are touched upon, if at all, in only a cursory way. In addition, the focus of this paper is on provisions in shareholder agreements which are Unanimous Shareholder Agreements, i.e. those in which the shareholders have active participation in management of the entity (and which, as a result, the directors’ power to manage is withdrawn, to the extent provided in the agreement).


The precedent elements included in this paper have, in most cases, been pared down in order to illustrate the mechanism in as simple a manner as possible. It is assumed that the reader will be able to expand upon each to fit the particular circumstance and give the provision the certainty and clarity required. The use of definitions, definition sections and appropriate “boilerplate” is also assumed. Finally, since any particular mechanism may be appropriate to more than one of the events discussed below, an efficient lawyer will isolate the mechanism in such a way that it can be incorporated by reference into any particular provision dealing with specific events. Drafting on this basis will enable the lawyer to concentrate on price and terms differences from event to event, and even these can be isolated to allow for incorporation by reference.


Some of the precedents discussed include reference to shareholder advances or loans. Since shareholder investment in corporations typically involves advances and/or loans as well as the subscription for or purchase of shares, it is assumed that the lawyer preparing the document will either include them in drafting appropriate provisions, or provide for them separately and specifically. It is also assumed that closing mechanics will be addressed separately, either specifically or generically.


It is always necessary to identify the income tax issues associated with the particular clauses and transactions contemplated. A detailed discussion of tax issues is beyond the scope of this paper. As a result, references to income tax have been kept to a minimum and, when made, are general in nature, to highlight issues or to serve as illustrations. The income tax regime applicable to this area is unfortunately so complicated that no single precedent or set of precedents can possibly address all concerns. Specific planning is required in each instance. It is assumed that any lawyer participating in negotiating the agreement will, in all cases, ensure that tax issues are given proper consideration by a qualified advisor.


Finally, I wish to acknowledge my former colleague, Doug Steinburg, from whose prior work this paper has (generously) borrowed.




There is no requirement at law, whether by statute or otherwise, that any corporation be governed by a shareholder agreement. Shareholder agreements are, however, commonly used to supplement the statutory and governance regimes that apply to corporations. From the viewpoint of the broadest of broad brushes, every provision of a shareholder agreement falls under one (or perhaps both) of two categories: ownership control, and management control. It is the second of these categories that distinguishes a shareholder agreement from a “Unanimous Shareholder Agreement” (“USA”), a purely statutory creation. Dealing with these two broad headings is the basis for each lawyer’s approach to the particular client situation at hand.


Ownership control also necessitates dealing with certain events which may require (or create the desire for) corporate “divorce”, which is dealt with separately in Part II of this paper.


The main focus of a shareholder agreement is to plan for (or in some cases, against) certain contingencies or future events by having the shareholders agree, at a time when they are not in a dispute or deadlock, what rules and procedures are to govern their relationship in various circumstances. It is trite to say that it is much simpler to bring parties together in agreeing what is “fair” as to a set of rules to apply in the case of future relationship difficulty, for example, than when the relationship has already suffered damage. What is often most challenging to the lawyer preparing the agreement is assessing what future circumstances should be contemplated, in order to make the document useful to the shareholders.


The competent counsel’s key role, as a result, is to learn as much as possible about the client’s objectives, needs, risk issues and other related information, and to use this, together with forms and precedents, to turn out a document that addresses each particular client’s individual circumstances. Term sheets or issues lists can be helpful at an early stage for those client situations which appear complex, to permit all parties to focus on the alternatives available for dealing with particular events or contingencies, rather than attempt to digest all of the issues at the same time as reviewing a lengthy and complicated legal document.


It should be noted that even where a USA is in force and all of the powers of the directors have been transferred to the shareholders, the corporate statutes still require that the corporation maintain an board of directors that is properly constituted. For instance, the board, even if it does not possess any meaningful powers in relation to the corporation, must continue to meet the statutory residency requirements.


Part I



The issues relating to control of the business and affairs of a corporation generally fall into two categories: matters which relate to the rights and duties of directors, and matters which relate to the rights of shareholders. Examples of some of the more significant issues in each of the categories are noted below.


While the ability of shareholders to enter into and enforce agreements relating to their rights as shareholders has long been recognized by the common law, the common law refused to enforce agreements which had the effect of fettering the discretion of directors. Modern corporate statutes, however, provide that the fettering of the discretion of the directors can be accomplished through the use of a USA .


Besides being required to be made between all of the shareholders of a corporation or by declaration if only one shareholder , the distinguishing characteristic of a USA is that it must 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” . Thus, to the extent that the USA restricts the powers of the directors, it can be said that their discretion is, at least to some extent, fettered. Both the CBCA and MCA provide in addition that, to the extent the powers of the directors are restricted by a USA, the shareholders assume all the rights, powers and duties of directors in that regard and the directors are relieved of the duties and liabilities in respect thereto . Note that there is an interesting distinction between the CBCA and MCA provisions regarding confirmation of the ability of shareholders to fetter their discretion in the context of management decisions, in that s.146(6) of the CBCA expressly permits shareholders to fetter their discretion in exercising the powers of directors, whereas there is no equivalent provision in the MCA. However, given the fact that the MCA recognizes pooling agreements (see below), the better view is that shareholders are indeed able to fetter their discretion, and as a result this is quite likely a distinction without a difference.




Two different approaches are available in drafting control provisions. In one approach, those matters ordinarily the province of directors merely require the consent or approval (by resolution or otherwise) of the shareholders or by votes, or both. Appendix “A” is an example of the consent or approval approach to control issues of this type. The second approach removes the particular matters from the purview of the directors and leaves them solely in the hands of the shareholders. Appendix “B” is an example of the removal type of control mechanism.


In the first approach, the directors retain the power to initiate or not initiate action in respect of a particular issue, and the shareholders’ role is limited to one of ratification or rejection usually by specified vote approval threshold(s). In the second, the role of the directors is curtailed and the shareholders are the only ones competent to both initiate action with respect to certain issues and to ratify or defeat, again usually by vote approval threshold(s). It is therefore arguable that in respect of any action taken by means of the first approach, the duties and liabilities of the directors would remain essentially unaffected by the restriction only in part of director powers. Thus, for example, a prohibited dividend declared by directors, although requiring the approval of the shareholders, would still leave the directors liable with respect thereto . The more interesting question is whether the necessity for shareholder approval would render the approving shareholders, at least, liable in the same manner or extent as directors? And in either case are they eligible for the same protections which may be afforded directors such as indemnity or insurance or the right to dissent ? In the removal method, there seems no good reason why they should not, but the approval method is less clear-cut.


In circumstances where one shareholder (or a related group) has a majority on the board, it is important to consider whether there are any issues that should not be decided by a majority vote of the board representatives. A class of material decisions (to be set out in the agreement) may instead require unanimous director and/or shareholder approval, or by super majority or other approval threshold. Appendix “A” deals with some examples of the types of matters that might be addressed in such a voting approval regime.




A mixture of the two approaches may, in many cases, be necessary in any USA: one to preserve the status quo between a majority and minority, and the other to attain specific objectives agreed to at the outset. It is impossible to suggest which approach will be more beneficial as the particular interests of the parties, the number of parties, and the inter-relationship of the various control issues will all play a role. The following is a short list of control issues which may arise. Not all are necessary or necessarily appropriate to be addressed by way of approval mechanisms (whether unanimous or some reduced threshold) in any given situation.




  1. filling vacancies on the Board of Directors;


  1. borrowing of money;


  1. giving of guarantees;


  1. granting security upon the assets of the corporation;


  1. enactment or amendment of by-laws;


  1. issue or transfer of shares (including preemptive rights);


  1. appointment of officers and their compensation;


  1. declaration of dividends, purchase for cancellation or redemption of shares;


  1. incurring of significant capital expenditures;


  1. change in the nature of the business of the corporation;


  1. entering into any contract or arrangement out of the ordinary course of the business of the corporation, or in some cases, any “material agreement”;


  1. meetings of directors (frequency, calling, place, quorum, notice and content);


  1. Chair’s casting vote;


  1. hiring and firing of key employees, and dealing with compensation;


  1. signing authorities (bank, contract, limitations);


  1. establishment or change to fiscal year end, significant accounting policies;


In addition to these types of “management” issues, both the MCA and CBCA reserve certain matters specifically to the shareholders for authority and approval. Primary among these is dealing with fundamental changes , which have their own statutory approval thresholds. Nothing in the legislation, however, prevents parties from agreeing that a higher threshold should apply. A sample listing of these matters follows:




  1. election of directors (number, composition);


  1. voting with respect to the ratification of by-laws, articles of amendment, amalgamation, continuance or dissolution;


  1. voting with respect to the sale, lease or exchange of all or substantially all of the assets of the corporation;


  1. consenting to the waiver of appointment of an auditor;


  1. meetings of shareholders (frequency, calling, quorum, place);


  1. controlling pledging of shares by shareholders;


  1. other fundamental changes.


Control (or negative control) in this and other areas may be achieved through the use of special majorities for approval or vote pooling agreements, which the legislation specifically recognizes . The additional advantage of a USA which includes a vote pooling with respect to fundamental changes is that it may also restrict a shareholder’s right to dissent , at least in respect of a Manitoba corporation. Although subject to the oppression remedy , in Manitoba it appears possible to restrict the right of dissent. If the USA merely requires a shareholder to vote in a certain manner, is the shareholder still free to dissent notwithstanding an affirmative vote in such circumstances? Appendix “C” is a sample pooling agreement in a USA which contains a provision restricting a shareholder’s right to dissent from transactions undertaken pursuant to the Agreement.






The acquisition or proposed acquisition of control by a “non-Canadian” as defined in the Investment Canada Act (the “ICA”) must be considered whenever such a person is included as a party to the shareholder agreement. While in most cases the issue will revolve around the acquisition of voting shares, it is possible that the provisions of the shareholder agreement would affect the treatment of the corporation under the ICA.




The control of a corporation is relevant under the Income Tax Act (Canada) (the “ITA”) for a number of reasons. These include the corporation’s status as a private corporation, a Canadian-controlled private corporation (“CCPC”), a small business corporation and a family farm corporation. The status of the corporation can determine the tax rate applicable to certain types of income and the availability of certain tax preferences. For example, only a CCPC qualifies for the low corporate tax rate on certain thresholds of active business income (the small business deduction). A CCPC is a corporation that is not controlled by a non-resident person or public corporation or a combination of non-resident persons and public corporations. Status as a CCPC is also a requirement for the enhanced capital gains exemption available in respect of a “qualified small business corporation share” under the ITA.


Care must be exercised by the lawyer preparing the agreement to avoid giving a shareholder who does not otherwise control the corporation additional rights in the shareholder agreement (or the articles and by-laws) so as to create undue risk that the corporation could be considered to be controlled by that person in either a de jure or de facto sense.


Part II







The use of the word “Divorce” is not altogether appropriate to describe all situations where the share interests of a shareholder in a corporation may be eliminated or otherwise materially impacted. For the purposes of this paper, however, the term “divorce” is used as a shorthand method of indicating such events or occasions.


While the summaries which follow are not exhaustive – and probably never can be – occasions for shareholder divorce generally fall into three, sometimes overlapping, categories: specific shareholder events, inter-shareholder events, and intervening third party events.




Events can and do occur to individual shareholders – and, for the purposes of this paper, the principal or controlling shareholder of a corporate shareholder – which do not involve the other shareholders in a corporation or persons outside the shareholder group. Nevertheless, these events may, by fact or mutual agreement, have a direct impact upon the corporation and its remaining shareholders. Examples include:


(a) Death. The death of a shareholder, especially in the case of a corporation whose shareholders are active in its business, can have serious consequences for the future prospects of a corporation. In all events, shareholders are usually concerned with the preservation and withdrawal of their investment for the benefit of their testamentary beneficiaries in the event of their own death, and on the other side of the coin (as surviving shareholders), with the prospect of being in business with someone other than the person with whom they originally agreed to partner or co-own their business interest. This is particularly true of small business corporations, where the shareholders are most commonly actively involved in the business, and/or contribute different skills to the business activity, and will similarly affect closely held family business corporations where the issue of inter-generational transfer is premature or has not been adequately worked out. While the concerns are not necessarily at odds in solution, the mechanisms for solution can have significant impact on both parties and care must be taken in arriving at and drafting an appropriate mechanism. While a mandatory purchase or sale provision (funded by life insurance) is a common mechanism, the Put and Call should also be considered as alternatives which may leave the parties more flexibility.


(b) Disability. Many of the same concerns apply as for death, with the exception that the disabled shareholder (or his or her family) is often most concerned with continued income flow for financial support, as are the remaining shareholders with the disabled party’s continued participation in ownership of a profitable enterprise without “contribution”. The use of disability insurance can alleviate the income flow concern, but the issue of share purchase can remain a stumbling block especially in family held businesses, under-capitalized corporations, and where there is a risk that the able bodied shareholders may have insufficient financial resources to complete a buyout transaction. Calls and/or Puts may be appropriate in these circumstances, but particular care may be necessary with respect to payment terms depending on the financial resources available.


(c) Insolvency/Bankruptcy. Many of the same concerns arise as for death – at least with respect to the remaining shareholders. In addition, as the equity investment in many small corporations is often significantly represented by shareholder loans and advances, there is the added concern of repayment, especially where the parties see it having no discernible benefit to the insolvent shareholder and draining away personal or corporate funds which might be better used in the corporate enterprise. Depending on the marketability of the shares, a discounted price/long term Put or a long payment term Call could be employed. Remember that the income tax impact of such a transaction to the insolvent shareholder is of little or no concern. However, the provisions of the Bankruptcy and Insolvency Act may come into play if it appears that any transaction mandated by the Agreement may take place at less than fair market value.


(d) Marriage/Common Law Relationships and Relationship Breakdown. Be aware that spousal property legislation applicable in a jurisdiction in which a shareholder or his or her spouse (or former spouse) resides may permit a court to order the transfer of assets of one spouse to another in satisfaction of a spouse’s equalization rights in a relationship breakdown. The lawyer preparing the agreement should also consider that shareholders in a corporation may re-locate from time to time to jurisdictions other than the one in which they resided at the time of preparation of the agreement. As in many other situations, the introduction of an unanticipated shareholder (perhaps especially the former spouse of an existing shareholder) will be a matter of concern. Aside from the precautions the parties may take personally through spousal agreements, a right for other shareholders or the corporation to acquire the shares in circumstances such as a spousal property division should be considered. A “Call” right is often employed in these circumstances, and the lawyer preparing the agreement should seek directions on such questions as the price determination, and whether the right is limited to the shares sought to be or ordered to be transferred. Assuming voluntary transfers are adequately covered by the agreement, the issue of an involuntary transfer such as by court order under the applicable family property legislation, may be most efficiently addressed in a generic provision covering involuntary transfers (legal or equitable) generally.


(e) Loss of Status. The issue of loss of status, particularly the right or qualification to carry on a profession or trade, is of particular concern to shareholders of corporations whose business is or is related directly to the carrying-on of a profession. In the former case, the negative impact is readily apparent. In the latter case, usually characterized by management corporations, while there may be no direct impact on the ability to carry on the business, loss of status can create serious tensions among shareholders. Whether loss of status is voluntary (as for example retirement) or involuntary (contrast discipline and disability) may be a consideration where, for example a management corporation is or is contemplated to be separate from the professional practice or where it has a role to play in a larger plan for the shareholders.


(f) Retirement. The event of retirement differs from death and disability above, and boredom, burnout, fatigue and relocation below, in that it is usually a factor of age and is, or should be, planned for. As such, it should come as no surprise to the other shareholders and therefore should not present too great an adverse impact on the corporation. While this is an issue that may often be discussed and resolved by the parties outside of whatever the shareholder agreement may provide (given that it may have been prepared many years in advance of the retirement event), it should at least be addressed initially by the shareholders. Issues such as continued holding, valuation, payment terms, family holdings, non-competition and post-retirement consulting can dealt with if appropriate.


(g) Boredom, Fatigue, Relocation, Burnout. In recent years, society has been more willing to recognize and accept that people suffer burnout, relocate because of economic, family or other now acceptable reasons, or change careers even late in life. A shareholder, especially one ordinarily active in the corporate business, who is no longer able or motivated to play a role originally anticipated, can become a significant drag on the corporation and its other shareholders. A means for such shareholders to divest themselves of their shares (or find themselves divested) may therefore be appropriate in many circumstances. While rights of first refusal have been used for this purpose in the past, this technique may not be appropriate for owner-managed or other closely held corporations, whose shares are not very marketable given the size, business, or other characteristics of the corporation, or the relevant concern of other shareholders about their own financial resources and about with whom they may be forced to carry on business. Again, careful discussion with the clients and care in drafting may result in more appropriate mechanisms for the buy-out of a departing shareholder in such case.




Matters arising between shareholders are frequently the cause of significant dispute and recrimination. In this, perhaps more than any other area, the object or at least the result of a well drafted shareholder agreement should be to reduce the play of emotion, and to allow reason and an objective evaluation of the monetary cost to govern the actions taken. Examples of inter-shareholder events which may result in buy-out provisions being triggered are:


(a) Stalemate/Dispute: Differences regarding the direction of the business or affairs of the corporation are often a source of friction amongst shareholders, and when they result in stalemate (between shareholders holding equal voting control) or fundamental dispute, the only practical method of dealing with the matter may be to cause a divorce. A commonly used mechanism to quickly solve such disputes is either a forced or voluntary buy out. Thoughtfully drafted with the needs and interests of the parties involved, such provisions may, even if never used, have the result of preventing differences from maturing into disputes, by keeping the parties focused on the need behave in a practical and businesslike fashion for their mutual benefit, and to identify and solve those differences before they fester into divorce-worthy events. The particular mechanism or mechanisms chosen – shotgun, withdrawal, auction, first refusal, etc. – will depend on the present as well as likely future needs and resources of the parties involved or likely to be involved, relative shareholdings and the importance of each to the business of the corporation. Whether the corporation is to a particular shareholder a primary income source, an investment, a family business or the means by which a particular or peculiar knowledge base, asset, or skill is exploited are just some of the matters to be taken into consideration. For example, it will be of little comfort for an investor to know that he or she will have the means to control and own all of the shares of a corporation, where that corporation’s business success is dependent on the particular skill or knowledge of the other shareholder.


(b) Loss of Employment: The ability to acquire or dispose of shares where the shareholder is employed by the corporation in question is of particular importance in situations where employees are or are made minority shareholders. Whether termination of employment is voluntary or involuntary, just or unlawful may bear to the terms of purchase, but should not bear to the question of whether or not the shares may or may not be either purchased or disposed. The difficulties presented by a disaffected shareholder usually outweigh the inconvenience or financial strain of an involuntary purchase or sale.


(c) Failure to make Advances or give Guarantees: Where it is anticipated that corporate financing will involve significant shareholder participation, it may be necessary to consider remedies such as the involuntary sale by shareholders who fail to advance or guarantee proportionately. Alternatives such as charges against defaulting shareholder interests, accelerated re-payment of excess amounts, and interest on excess loans should also be considered. Involuntary sales may take the form of sale of all interests, dilution or super dilution.


(d) Other breaches of the Shareholder Agreement or other agreements between the corporation and the shareholder: In addition to the consideration of the appropriateness of remedies described in paragraph (c) above, consideration should be given to alternate or interim measures such as suspension of particular rights in respect of particular matters such as options, puts or calls, or vote pooling provisions such as for the election of directors. Care must be taken however to avoid provision for variation or suspension of rights which, by the incorporating legislation, are not capable of modification in a USA. For example, the right of a share to vote is subject only to the legislation and the Articles under the MCA . A provision in a shareholder agreement which purported to restrict that right would likely be found invalid. Contrast a provision in a shareholders agreement which operated like a pooling agreement requiring the defaulting shareholder to vote in the same manner, say, as the majority of non-defaulting shareholders.


(e) Loss of Canadian resident status and/or CCPC status: The loss of status by a shareholder, particularly a majority shareholder, as a resident of Canada for the purposes of the ITA can have significant impact upon a corporation and consequently its remaining shareholders. As a CCPC, a corporation enjoys certain income tax benefits which translate directly into return on shareholder investment. Besides change of state of residence, loss of CCPC status can occur where a controlling shareholder becomes a public corporation. Certainly where circumstances warrant, an action taken by any shareholder which would (or could, in the case of a minority shareholder) cause the corporation to lose its CCPC status should be considered as an event triggering a buy-out provision in the USA.


(f) Transfer of shares or change of corporate shareholder control: As with other situations described above, transfers and changes of corporate shareholder control result in change to the original group that may not be acceptable to the remaining shareholders. Call rights in such situations are the usual means to preserve control over the members of the group.




Certain events initiated by outsiders might logically be considered to trigger a buy-out or analogous provision in the USA. The following are all assumed to be bona fide offers from unrelated parties. The USA should be worded to guard against the use of the applicable divorce provisions to obtain by an indirect means what cannot be obtained through direct provision or negotiation.


(a) An offer by a third party to acquire all or substantially all of the assets of the corporation, in circumstances where the shareholders are not unanimous in their decision to sell. Often a buy-out provision will enable (or sometimes, require) the minority who do not wish to sell to purchase the shares of the majority. Consideration in formulating the buy-out price should be given to the imputed value of the shares as if the sale had taken place and the payment terms as contained in the offer; the object being to leave the majority in roughly the same position they would have been if the sale of assets had actually proceeded. An alternative, subject perhaps to specified minimum percentage on the minority side of the issue, would be to permit or require the majority to acquire the interest of the minority in the corporation on a formula basis which is determined with or without regard to the impact that the third party offer might have on the value of the shares; the object in this instance being to allow the majority to carry on with their plans without the risk of shareholder dissent remedies impeding them but also enable the minority shareholders to take what advantages may be available to them under the ITA. The choice of alternatives will usually be governed by considerations such as financial resources, nature of the business, whether the corporation is the primary income source, and whether the corporation carries on a family enterprise.


(b) An offer by a third party to acquire all of the outstanding shares of the corporation. The same considerations and alternatives apply to this situation as in (a) above, but a further alternative is a “drag along” which enables a majority shareholder to force the remaining shareholders to sell to it or directly to the third party on the same terms at the same time.


(c) An offer by a third party to acquire all or part of the shares (usually a control block) of one or more but not all of the shareholders. The standard provision designed to meet this situation is a right of first refusal. A first refusal, however, may not be satisfactory where the other shareholders lack the financial resources to acquire, where the terms of the offer strain those resources, where the other shareholders are seeking opportunity to dispose of their own shares, or where the offer is made by a person who is a permitted transferee within the agreement such as another shareholder, family member or related party. An alternative method to consider is a piggyback or tag-along where, essentially, a selling shareholder may only obtain an offer which includes the shares of the other shareholders.






What follows is a description of a number of shareholder divorce or buy-out mechanisms.




As a restriction on the transferability of shares, the hard right of first refusal (“HR”) is likely the most commonly used in shareholder agreements, at least in Canada. Unlike the soft right of first refusal (“SR”), the HR is triggered by an offer (assume bona fides) by a third party (assume arms length) to acquire all of the shares of a particular shareholder in the corporation. Appendix D is a sample HR. Offers for less than all shares may be treated similarly in most cases.


The primary advantage of an HR is to protect shareholders from the introduction into the corporation of incompatible “partners”, and that an HR gives the remaining shareholders an opportunity to know the identity of the third party before deciding whether or not to purchase. A second advantage is that a bona fide, arms length offer should normally be productive of a price which is reflective of the market value of the shares – at least of one with this type of restriction on dispositions, without significant effort or expense. The major disadvantage proceeds from the latter point; that is to say, the marketability of shares will be reduced by the presence of an HR.




– restriction on operation of the provision during start-up years;


– adequacy of notice and response time periods set out in the provision;


– ability of all shareholders to participate in purchase pro rata, or otherwise;


– application of the HR in the event of failure of closing of third party offer or change in terms of third party offer;


– continued application of agreement to third party buyer after purchase;


– substitution of cash consideration for any non-cash consideration contained in third party offer;


– provision (generic or specific) for releases, indemnifications, and guarantees outstanding;


– application of restrictive covenants to the vendor in the event of either sale to the third party or remaining shareholders.




A soft right of first refusal, sometimes referred to as a right of first offer, differs from an HR in that it is not triggered by a third party but rather by a shareholder. In a “normal” SR, the shareholder (“vendor”) serves notice on the remaining shareholders that the vendor wishes to sell all of the vendor’s shares at a specified price and terms. The remaining shareholders may accept or reject within a certain time, but failure to receive acceptances for all of the shares will entitle the vendor to seek out and sell to a third party, whose identity is unknown, on the same terms or on terms more advantageous to the initiating shareholder/would-be vendor. A time period will usually be specified after which the vendor may not sell to a third party without re-application of the SR. It may also provide that an offer on terms more favorable to the purchaser than contained in the notice will require the application of an HR on those terms.


A variation of the SR (often called a Withdrawal) enables the vendor to simply give notice to the remaining shareholders of the vendor’s desire to sell. A period is given to arrive at an agreed upon price and terms, failing which the price and terms are fixed in accordance with a formula or arbitration provision and pre-determined terms. Acceptance of the offer to sell, however, must be given before either the negotiations or application of the pre-determined provisions. If there are insufficient shareholders to acquire all of the vendor’s shares, then, depending on the particular function of the Withdrawal, the vendor is entitled to sell to any third party at any terms for a particular period of time or indefinitely. Where the vendor’s rights on failure of purchase of all shares is to cause the corporation to be wound up, the Withdrawal is more akin to a “Put”. An example of an SR in the form of a Withdrawal in contained in Appendix E.


The SR has the advantage of not impairing the marketability of shares as with an HR, but leaves the remaining shareholders with considerably less certainty, especially as to the identity of future shareholders. It also possesses, especially in the Withdrawal format, some degree of dispute resolution inasmuch as may allow a disaffected party to exit the corporation.




– essentially the same considerations as for an HR;


– provision or modification of pre-determined pricing and terms provisions.




The principal purpose of a tag-along right is to enable a minority shareholder to participate in the “control premium” that a third party may be willing to pay for the shares of the majority, and to ensure that the minority has knowledge and “accepts” the identity of a party gaining control of the corporation. Basically, it prohibits a selling shareholder from selling unless an offer for all of the shares in the corporation is obtained on the same price and terms. The provision of a tag-along can be an important addition to a right of first refusal, and is frequently found combined with a first refusal as an option. When the tag-along is an option as part of a hard right of first refusal, it may be appropriate to provide the further option to the vendor to require the person holding the right to elect between purchasing and joining in the sale to the third party. A provision such as this would have the effect of converting the tag-along into a drag-along/carry along (discussed below). Appendix G contains a sample tag-along right.




– similar to those for an HR, above.




A carry along right entitles a shareholder or shareholders holding a certain ownership threshold of shares (often a majority, but this is a variable for the lawyer preparing the agreement to consider in each circumstance) to require the remaining shareholders to sell to a third party who has offered to acquire all of the shares of the corporation, on the same terms and conditions. This type of provision is particularly important to majority shareholders with smaller-minority co-shareholders, or where family members or employees have been given the opportunity and do acquire shares. It is often tied with a tag-along right to balance the minority interests. By participating in a full takeover, the minority will usually benefit from the best possible price and will be relieved of any concerns which might otherwise have arisen because control is obtained by a non-resident or by a public corporation. An even greater degree of fairness can be obtained where the minority is given a right to acquire all of the shares of those who wish to sell to the third party. See Appendix F for a sample including the right of those who do not wish to sell to purchase from those who do, as well as a tied carry along/tag-along .




– will alternative acquisition by minority be cost prohibitive;


– can this provision be used to “squeeze out” the majority.


  1. PUT


For the minority shareholder, the “Put” is one of the most attractive rights available in a shareholder agreement. The opportunity, without obligation, to dispose of shares which would otherwise have little marketability solves a major concern to persons such as employee shareholders. It works by allowing the shareholder (or personal representative), on certain specified events such as death, dismissal, retirement, etc. (or less commonly, upon no event other than the passage of time), to give notice to the corporation and/or shareholders to purchase all but not less than all of the shareholder’s shares. The application of a formula is utilized to determine the price and the terms of purchase will often allow the purchaser to pay cash on closing or select a pre-determined payment plan together with specified interest and share pledge provisions. Different price structures or terms may also be provided depending on the nature of the triggering event. Additionally, the agreement may remain silent on the remedies of the selling shareholder in the event of default or of failure of all parties to close or it may specify remedies (additional or alternative) available in such a case (forced liquidation, for example). See Appendix K for a sample put option.




– to whom can the Put be made? The corporation, remaining shareholders?


– if to corporation, consider the income tax consequences of a purchase for cancellation. Consider also a back-up Put to shareholders where the corporation might be prohibited at law from purchasing for cancellation;


– consider valuation and payment terms;


– consider limitation of right in start-up years or while or for a period after similar rights have been exercised;


– consider a time limitation from the triggering event to exercise the Put (or alternatively, have it expire);


– consider whether a firm agreement (forced purchase and sale) may be an alternative in certain circumstances;


– consider use of insurance proceeds where available to accomplish purchase by corporation or surviving shareholders;


– consider non-competition, releases and indemnities as appropriate.


  1. CALL


A “Call” is simply an option to acquire. Like the Put, it will usually involve the use of defined triggering events, price formula and pre-determined payment terms, but is initiated by the shareholder(s) to acquire the interest (usually all and only all) of other shareholders. It is certainly the most effective means of controlling who is, can become, or will continue to be a shareholder in the corporation. Like the Put, a Call is an optional matter to the one invoking it and a firm agreement requiring the sale and purchase should be considered in certain circumstances (such as insurance funded purchase on death, for example) as an alternative.


It is not uncommon for a Puts and Calls to be used as back-ups to one another. For example, a USA might provide that on the death of a shareholder, that person’s shares are permitted to be transferred to a spouse (enabling the spouse to take advantage of certain tax provisions) and a Put granted to the spouse. To protect the remaining shareholders from the introduction of an unwanted new partner, a Call may be given to them exercisable for a certain period of time in the event the spouse does not exercise the Put. In the result, maximum flexibility is achieved such that if both the remaining shareholders and the spouse are satisfied with the continued holding of the shares by the spouse, same is achieved without modification of the agreement simply by not invoking either the Put or the Call or by granting the Call right to the corporation or the Put to be given to the corporation to enable dividend rather than capital gains treatment. See Appendix H for sample Calls for death, bankruptcy or disability.




– essentially the same as for a Put (sometimes in reverse) except that the concern for the financial strain caused by simultaneous or consecutive buy-outs may need development in the area of the time period by which the call may be exercised;


– consider the income tax treatment which will result to either the remaining shareholders or exiting shareholder.




The “Shotgun” right is sometimes described as the ultimate dispute resolution mechanism. In its simplest form, the person “pulling the trigger” (invoking the provision) sets the price per share and terms for the purchase of all of the shares, and recipient of the notice has a limited period of time to respond, with the right either to elect to purchase at that price and on those terms, or to sell (at the same price and terms). Although the question of value is settled by the person invoking the right, the risk is great and the price tempered by the uncertainty of whether that person will buy or sell. Variations are possible to soften the impact to the recipient of the notice. A simplified form of Shotgun with such a variation is included as Appendix I.


While there is often some immediate attraction to clients to the simplicity and appearance of fairness of the Shotgun, the question as to whether a Shotgun is appropriate in any particular agreement should be foremost in the lawyer’s mind. Where the parties are 50/50 and in similar financial conditions (both with respect to resources and liquidity), it may work well. But where the parties are of unequal strength or have unequal interests (such that the total dollar outlay for one could be two, three or more times larger than the other), or where the parties have equal but different talents to contribute, or one has certain skills or knowledge required for the corporation to succeed, it may not be appropriate. Where appropriate, the risks and uncertainties very often serve to encourage settlement and thereby avoid its use. Note that the Shotgun can easily be used by a majority to squeeze out the minority.


A variation of the Shotgun is an auction. In either specified circumstances (e.g. deadlock) or unrestricted circumstances, a shareholder may give notice invoking the provision requiring all of the shares of the corporation to be put “on the block” at a private auction which only the shareholders may attend. Terms for payment, re-payment of shareholder loans and advances, releases, indemnities, and treatment of any preference shares are pre-determined. Bidding may begin on an unrestricted basis or at a level which is pre-determined in accordance with a formula (e.g. book value). The successful bidder takes all the shares.


Some Court decisions have arrived at interesting variations on shotgun and auction rights in addressing oppression remedies and other shareholder disputes. For example, in the Ontario case of Re: Wittlin et al and Bergman et al , after setting out various conditions for the sale of shares by one party to the other, the disputing shareholders were to be placed in a room on either side of a partition with only their faces visible, buzzers in hand. Beginning with a set price, the process would be activated by a stopwatch. Every six seconds, the price would reduce automatically by a set gradient. Pushing a buzzer stopped the price decline and established the preliminary price. The shareholder that did not push the price buzzer was entitled to elect to “kick or receive”, that is, whether it would buy or sell at the preliminary price. However, if the buzzer pushing party were required to purchase, it could in turn elect to turn the tables and require the non-buzzer-pusher to purchase its shares at 80% of the preliminary price.




Forced liquidation may be used on its own, as an alternative to a Shotgun, or as a remedial measure to a failed buy-out such as a Call. In the former case it has many of the same disadvantages of a Shotgun with the added risk of significant loss in value. In the latter case its primary role is as a “hammer” to encourage compliance or completion where the action of the other shareholder(s) is optional (see Appendix E and Appendix H for examples of the latter case). The potential for sale at much less than market value, the costs of windup, and the potential income tax cost to shareholders may deter failure by the remaining shareholders to act or react in a particular way in the specified circumstances. It may be particularly inappropriate where one of the shareholders possesses particular skills or knowledge, or personal goodwill, upon which the corporation depends more for success than other factors.




– In the context of a USA, enforcement of the provision is assisted by the provisions of both the MCA and CBCA . To eliminate any court involvement, a liquidation provision should contemplate a voluntary liquidation by providing the shareholders with each other’s irrevocable power to cause the corporation to be liquidated;


– consider provisions requiring a first attempt to sell the assets (or shares?) of the corporation as a going concern;


– clearly specify time frames and procedures.




Dilution is essentially a Call right, where the triggering event is a default by the shareholder who is subject to dilution. The most frequent provision of a USA where dilution is provided is in dealing with the financing of the corporation. Positive covenants to finance the corporation in the future are common but more or less important depending on the purpose for which the corporation was formed. While the problem may be addressed by provision of repayment priorities, interest, costs, or security to those who advance, another alternative is to enable the shareholders not in default to acquire the shares of those who default. Such acquisitions may be strictly in proportion to the defaulted obligation and at fair market value, or in amounts greater than such proportion at deflated value (sometimes called “super dilution”). Still a third alternative is acquisition at no or nominal value: forfeiture.


While at least one instance of forfeiture has been upheld , it is certainly possible that either super dilution or forfeiture might be determined to be a penalty and not a genuine pre-estimate of damages and any such provision in a USA varied by the courts in appropriate circumstances such as where there is oppression.




– what is the method of valuing shares?


– who will hold the right to acquire – the corporation or the other shareholders?




Where there are more than two shareholders involved, it may be easier to provide for pro rata participation in any buy-out by a general provision rather than repetitive provisions requiring notice recipients to offer to other shareholders. A sample is provided in Appendix J.






Consideration of the income tax consequences of the selected buy-out mechanism can have a major effect on how the shareholders’ agreement is drafted. However, as noted earlier, a meaningful analysis of the various tax issues and options is well beyond the scope of this paper. As a general comment, it should be noted that the income tax consequences of a purchase of a shareholder’s shares vary widely depending on who the purchaser of the shares is. The following possibilities exist:


  1. a purchase by other shareholders;


  1. a purchase by the corporation;


  1. a purchase by related or unrelated persons; or


  1. a combination of the above.


Deciding upon which of the foregoing alternatives is appropriate depends upon many factors, including the following:


  1. whether insurance proceeds will be used to fund some or all of the buy out;


  1. whether the individual shareholders have capital gains exemptions remaining;


  1. whether shareholders have significant adjusted cost bases inherent in their shares (and, in some cases, how the adjusted cost base arose);


  1. whether shares of the selling shareholder will be owned through a holding company or personally;


  1. whether the corporation will be claiming the small business deduction at the time of the purchase; and


  1. whether, when a holding corporation is used, subsection 55 (2) of the ITA will apply on a corporate purchase.


A detailed review of all of the above factors is required before drafting can begin.


[Requests for Appendices should be directed to the Author]



  1. e.g. s. 146(1) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”), and s. 140(2) of The Corporations Act, R.S.M. 1987, c. C225 (the “MCA”).


  1. CBCA s. 146(2); MCA s. 140(3).


  1. supra n.1. Note that the MCA provision does not include the phrase “, or supervise the management of,…”


  1. CBCA s. 146(5); MCA s. 140(5).


  1. CBCA s. 42; MCA s. 40.


  1. CBCA s. 118(2); MCA s. 113(2).


  1. CBCA s. 124; MCA s. 119.


  1. CBCA s. 123; MCA s. 118.


  1. MCA Part XIV; CBCA Part XV.


  1. MCA s. 140(1); CBCA s. 145.1.


  1. MCA s. 184(1); contrast CBCA s. 190(1).


  1. MCA s. 234.


  1. MCA s. 24(4); compare CBCA s. 24. While worded differently, the result is the same for this purpose.


  1. MCA s. 184; CBCA s. 190.


  1. (1994), 19 O.R. (3d) 145.


  1. MCA s. 207(1)(b)(i); CBCA s. 214(1)(b)(i).


  1. Ringuet v. Bergeron (1960) 24 D.L.R. (2nd) 449 (S.C.C.).

DISCLAIMER: This article is presented for informational purposes only. The views expressed are solely the author(s)’ and should not be attributed to any other party, including Taylor McCaffrey LLP. While care is taken to ensure accuracy, before relying upon the information in this article you should seek and be guided by legal advice based on your specific circumstances. The information in this article does not constitute legal advice or solicitation and does not create a solicitor-client relationship. Any unsolicited information sent to the author(s) cannot be considered to be solicitor-client privileged.

If you would like legal advice, kindly contact the author(s) directly or the firm's Managing Partner Norm Snyder at, or 204.988.0302.

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About the Author
Timothy Kurbis
Timothy Kurbis
Managing Partner