Many small businesses are operated through a corporation. The smallest of these will be single-person corporations, where one person is the sole director and the only shareholder. However, if the corporation has more than one shareholder, it is often wise to have a Unanimous Shareholders Agreement (“USA”).
A USA governs certain aspects of the shareholders’ relationships with one another, and regulates the management of the corporation. A good USA can be very useful. For example, a USA will typically provide for what will happen if one of the shareholders dies, or if the spouse of a shareholder seeks ownership of the shareholder’s shares in a divorce proceeding. It is important to ensure that your USA effectively deals with these types of scenario.
A recent court decision in Alberta highlighted the need to ensure that your USA is tailored to your circumstances, and is not simply “boiler-plate”. In Ziegler v. Green Acres (Pine Lake) Ltd., 2013 ABQB 349, the Corporation’s USA mandated the eventual sale of a shareholder’s shares if “sickness, accident or disability afflict and prevent any shareholder… from continuing active full time employment with the corporation”. One of the shareholders was killed in an accident, and the corporation served notice of its intention to purchase his shares on the basis that his death would prevent him from continuing his active employment with the corporation. The deceased’s personal representative disputed the claim, and the question before the Court centered on whether that clause in the USA required the deceased’s estate to sell the shares. The Court felt that the drafting of the USA did not contemplate a shareholder’s death as an event that triggered the clause. The Court noted that the USA could have been drafted so that the death of a shareholder would require the sale of his/her shares – but that this particular USA did not require that.
Although one may think it is common-sense to assume that death could reasonably be interpreted as something that would prevent the deceased from continuing full-time work, the point here is that one cannot assume the result – you must draft your USA carefully to ensure it achieves the required objectives. (Actually, the Court’s determination on this issue affected how the shares would be valued, among other things).
If your corporation does not have a USA, or if you are unsure what your corporation’s USA does or does not accomplish, Stephen Mogdan at Stringam Denecky LLP would be happy to review your circumstances and your USA to ensure it is effective and appropriate. Contact him at email@example.com or (403) 328-5577.