subject: Shareholder Agreement Form (Part 10): Managing the Affairs of the Corporation [print this page] Managing the Business and Affairs of the Corporation
Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about a shareholder agreement or unanimous shareholder agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I'm one of them!). If you'd like, you can contact me directly.
You need to identify the Corporation's Business from the get go. Why? Well, that definition will come back when you start to talk about restrictive covenants (e.g. non-compete, non-solicitation, etc.). The shareholders agreement will say something like "the Shareholder cannot compete in the Business of the Corporation". And since "Business" is a defined term found elsewhere in the agreement, you'll know what it means. Another reason why defining the Corporation's "Business" is a good idea is because shareholder and / or board approval may be required to change (for example, expand) the "Business" of the Corporation.
Restricting the Discretion of the Board
Now, as I've previously blogged about, the Board of Directors of any corporation are the ones who make the decisions about running the corporation. They have been elected by the shareholders and they appoint officers to manage the corporation on a day-to-day basis.
Now enter the shareholders. They are not allowed to fetter the discretion of the directors through an agreement. So says section 108(5.1) of the Ontario Business Corporations Act. BUT, importantly, they can relieve the directors of their responsibilities and ASSUME those responsibilities themselves! Wow! This is done through a UNANIMOUS SHAREHOLDERS AGREEMENT. So the shareholders can restrict the powers of the directors (to exercise discretion and powers) and put themselves in their shoes. Doing so would make the shareholders' liable (and if the shareholder is a person, then personally liable) as directors though.
Nomination of Directors
So assuming the shareholders have entered into a unanimous shareholders agreement to usurp the powers of the directors for themselves, the next question becomes: how are they going to elect the directors? Will each shareholder be a director? Will each shareholder have a right to appoint someone else as a director? What about corporate shareholders? Will their principal (i.e. owner / operator / CEO) be a shareholder? Can a shareholder replace themselves? What is the requirement to establish a quorum? What is required for the shareholders to pass resolutions on matters (e.g. majority, 2/3rds, unanimity, etc.)? If there is a tie, who will be the tie-breaker with their deciding vote? How do you fill vacancies on the board? Will directors be elected in proportion to the shares held by a shareholder (e.g. a shareholder with 10% of the votes will elect 1 director of the 10 spots available).
Meetings
How will notice of meetings be effected? How much time must be given before the meeting can be held? Where will it take place? Can the meeting be delayed by a director notifying the other parties that they can't make it? Can notice of the meeting be waived if all of the directors consent in writing? Can meetings be done by proxy or electronically or over the phone, or must they be in person? Generally, to avoid disputes, you want to be flexible here. You may not want to have stringent conditions as to what must be included in the notice, where it takes place, how it is to be conducted because this may lead to one party claiming that the shareholders agreement was not followed to the letter.
Basically, you'll need to think about these and other issues concerning the governance of the corporation. Remember, shareholders have a lot of flexibility in writing their own rules of procedure and governance requirements respecting the Corporation. Not only is a shareholders agreement a private contract as between the parties (the Corporation and the shareholders), but it is also a constating document that is akin to the articles (and has more authority than the By-Laws)!
Remember: if you'd like to buy a text link on this blog to your website, you can contact me. Also, if you're looking for aToronto Shareholder Agreement lawyer, you can contact me to get a quote.
Shareholder Agreement Form (Part 10): Managing the Affairs of the Corporation
