Unanimous Shareholder Agreement (USA)

A unanimous shareholder agreement (USA) is a written agreement between all shareholders of a corporation that restricts or removes the powers of the directors and transfers those powers to the shareholders. This is the defining feature that distinguishes a USA from an ordinary shareholder agreement.

In Ontario, USAs are governed by Section 108 of the Ontario Business Corporations Act (OBCA), R.S.O. 1990, c. B.16. The key provisions of Section 108 are:

• A written agreement among all shareholders, or a written declaration by the sole shareholder, that restricts the powers of the directors to manage or supervise the management of the business and affairs of the corporation is valid
• To the extent that a USA restricts the powers of the directors, the parties to the agreement — the shareholders — have all the rights, powers, duties, and liabilities of a director whether or not they are directors
• When shares are transferred, the new shareholder is bound by the USA if they had notice of it

The effect is that a USA allows shareholders to take direct control over decisions that would otherwise be exclusively within the jurisdiction of the board of directors. This is a significant departure from the default corporate governance model.

An ordinary shareholder agreement and a USA look similar but have fundamentally different legal effects:

Ordinary shareholder agreement: - Does not need to be signed by all shareholders (it can bind only those who sign it) - Cannot override the OBCA's grant of management authority to the directors - Does not give shareholders the powers and liabilities of directors - New shareholders are not automatically bound unless they sign a joinder

Unanimous shareholder agreement: - Must be signed by all shareholders (or declared by a sole shareholder) - Can restrict or remove the directors' powers and transfer them to shareholders - Shareholders who receive transferred director powers also assume the corresponding director liabilities — including personal liability for wages, source deductions, and HST - Binds subsequent shareholders who take their shares with notice of the USA - Under Section 49(8) of the OBCA, the existence of a USA must be noted conspicuously on the share certificates of the corporation

The requirement to note the USA on share certificates is a disclosure mechanism — purchasers of shares are put on notice that a USA exists and that they will be bound by it on acquiring the shares.

USAs are used in several circumstances where shareholders want greater direct control over the corporation's affairs than the default OBCA governance model provides:

Investor protection: In early-stage or venture-backed companies, investors may require a USA to ensure they have direct decision-making authority over critical matters — such as taking on debt, changing business direction, or issuing additional shares — rather than relying on board approval mechanisms that a majority shareholder could control.

Family business succession: In a family business where ownership is being transferred to children or the next generation, the founder may want to retain direct veto rights over key decisions during a transition period. A USA can enshrine those rights in a legally binding way that goes beyond an ordinary shareholder agreement.

Joint ventures: Two companies forming a joint venture through a jointly owned corporation may use a USA to ensure both parties have direct governance rights, preventing either from acting unilaterally through board control.

Professional corporations: In regulated professional corporations (medical, dental, legal), governance rules sometimes require specific restrictions on who can make management decisions. A USA can formalize these restrictions.

Simple closely held corporations: For a corporation with two or three shareholders who are also directors and operators, the distinction between a USA and an ordinary shareholder agreement may be less significant in practice, though the USA's binding effect on future shareholders (without requiring a joinder) can be an advantage.

The most significant practical difference between a USA and an ordinary shareholder agreement — often overlooked by non-lawyers — is that shareholders who receive director powers under a USA also assume director liabilities.

Section 108(4) of the OBCA provides that to the extent a USA restricts the powers of the directors, the shareholders who receive those powers 'have all the rights, powers, duties and liabilities of a director of the corporation, whether arising under this Act or otherwise, as if such shareholders were directors.' This means:

• Shareholders with transferred director powers are personally liable for unpaid employee wages under Section 131 of the OBCA
• Those shareholders can be personally assessed for unremitted payroll source deductions under Section 227.1 of the Income Tax Act
• Those shareholders can be personally assessed for unremitted HST under Section 323 of the Excise Tax Act

This is a significant consequence that shareholders should understand before entering into a USA. In some cases, it may be preferable to structure the governance arrangement using an ordinary shareholder agreement (with enforceable approval rights but without the transfer of director powers) to avoid the associated director liability exposure.

A well-drafted USA for an Ontario corporation typically includes provisions addressing:

Reserved matters requiring unanimous consent: Decisions that require agreement of all shareholders — such as changing the nature of the business, making significant acquisitions, taking on long-term debt, or issuing new shares.

Reserved matters requiring supermajority consent: Decisions requiring a specified majority (e.g., 75%) — such as capital expenditures above a threshold, entering key contracts, or changing accounting policies.

Restricted director powers: Specifying which powers have been transferred from the directors to the shareholders, and which powers (if any) remain with the board.

Share transfer restrictions: Rights of first refusal, pre-emptive rights, drag-along and tag-along rights, and buy-sell mechanisms (including shotgun clauses).

Dividend and distribution policy: Rules for when and how dividends are declared.

Management compensation: Processes for setting salaries and bonuses for shareholder-managers.

Dispute resolution: Mediation and arbitration provisions to resolve disputes without resort to litigation.

Amendment provisions: Specifying how the USA itself can be amended — typically requiring unanimous consent.

TechCo Inc. (60% shareholder) and DesignCo Inc. (40% shareholder) form a joint venture corporation, NewCo Inc., to develop a software product. TechCo wants control of day-to-day operations; DesignCo wants a veto over major decisions.

A regular shareholder agreement might give DesignCo approval rights over certain decisions, but it would not override the OBCA's grant of management authority to the board of directors — which TechCo could dominate by controlling the director election process.

Instead, the parties execute a USA under Section 108 of the OBCA. The USA: - Transfers decision-making authority for all matters above $50,000 from the directors to the shareholders - Requires unanimous shareholder consent for specific reserved matters (asset sales, debt exceeding $500,000, change of business) - Gives DesignCo the right to appoint one director despite its minority ownership - Requires notes on share certificates that a USA is in place

When DesignCo later sells its shares, the purchaser acquires them with notice of the USA. The purchaser is bound by the USA without needing to sign a separate joinder — a key advantage over an ordinary shareholder agreement in a transaction context.