What Is a Shareholder Agreement and Do You Need One in BC?

You are buying part of a private company in British Columbia, and someone has mentioned a shareholder agreement. You may wonder whether it is optional paperwork or something you should insist on before you pay.

This article explains in plain words what a shareholder agreement does, what happens without one, and which terms are worth raising. It also points out how buying shares differs from buying assets.

This article covers the law of British Columbia.

What a shareholder agreement is

A shareholder agreement is a contract among the owners of a company. It sits alongside the company's constating documents, such as its articles, and sets out how the owners will make decisions, how they can exit, and what happens if they disagree.

It is private. Unlike the company's formal records, it is something the parties negotiate and sign. That means it can be tailored to your deal, which is its main strength.

What happens without one

Without an agreement, you rely on the default rules in BC's corporate legislation and on the company's articles. Those rules are general and were not written with your business in mind. They may not address a deadlock, a departing owner, a price for your shares or a restriction on who can buy in.

If you are buying a minority stake, this is especially important to think about. The other owners may be able to make many decisions without you, and your ability to sell later may be limited. A lawyer can tell you exactly what the default rules provide for this company and where they leave you exposed.

Terms to consider asking for

• Decision-making: which decisions need all owners to agree, and who appoints directors.
• Share transfers: whether owners can sell freely, and any right of first refusal, so you are not stuck with a new partner.
• Exit rights: buy-sell terms and a method for setting the share price.
• Departure, death or disability of an owner.
• Dividends and how money is taken out of the company.
• Information rights: access to financial statements and records.
• Dispute resolution: how disagreements are handled before they become lawsuits.
• Non-competition and confidentiality, to the extent they are enforceable.

Which of these matter most depends on your percentage, your role and the type of business.

Buying shares: other points to check

A share purchase is not the same as an asset purchase. In a share sale, the employer corporation does not change, so employment continues with the same employer. PST does not apply to the sale of shares of a business. Asset sales are different: PST applies to taxable assets such as affixed machinery, equipment, computer hardware and supplies, but not to goodwill, inventory, accounts receivable or real property.

The company's own contracts matter too. If the company owns a franchise, a disposition of shares in the owning corporation counts as a grant under the Franchises Act, so check the franchise agreement before shares change hands.

Tax on a future sale of your shares also needs early thought. The lifetime capital gains exemption is available only to individuals disposing of qualified shares, or farm or fishing property. One test is that, throughout the 24 months before the determination time, the share must not have been owned by anyone other than the individual or a related person or partnership. The corporation must also meet asset tests. Whether your shares would qualify depends on the facts, so ask an accountant.

What to do next

• Ask whether a shareholder agreement already exists, and read it before you commit.
• Get the company's articles and share records.
• Decide what you need on exits, decisions, information and share transfers.
• Ask your lawyer to compare the default rules with what you want, and draft or review the agreement.
• Ask an accountant how the purchase and any future sale of shares will be taxed.
• Make signing the agreement a condition of closing, not something left for later.

Frequently asked questions