Many business owners in Ontario incorporate their companies and begin operations without ever putting a shareholders’ agreement in place. This oversight can lead to significant legal and financial risks, especially when disagreements or unexpected changes arise.
While Ontario’s Business Corporations Act (OBCA) offers some default rules, it does not address the unique needs and expectations of individual shareholders. Without a clear agreement, disputes can escalate quickly, and the absence of documented rules often leads to costly litigation and business disruption.
Why a Shareholders’ Agreement Matters
A shareholders’ agreement defines the legal relationship between the shareholders and the corporation, as well as among the shareholders themselves. It establishes the framework for decision-making, share transfers, dispute resolution, and rights and responsibilities of each shareholder. When absent, the business may rely on unclear expectations or oral understandings, which can easily fall apart over time.
Common Risks of Not Having a Shareholders’ Agreement
1. Shareholder Disputes Become Harder to Resolve
Without a formal agreement, there are no pre-set rules on how to resolve disagreements over major decisions like issuing new shares, approving budgets, hiring executives, or selling the business. The lack of a dispute resolution process often results in gridlock or legal action.
2. No Control Over Share Transfers
In the absence of restrictions, a shareholder may freely transfer their shares to an outsider including a competitor or someone misaligned with the company’s vision. A shareholders’ agreement typically includes a right of first refusal, buy-sell provisions, or consent requirements to prevent unwanted third-party involvement.
3. Difficulty Removing a Disengaged or Problematic Shareholder
When there is no clear exit mechanism, shareholders who no longer contribute or actively work against the company’s interests may still retain their rights and voting power. This can block critical decisions or deter potential investors. A properly drafted agreement outlines when and how a shareholder can be bought out.
4. Uncertainty Upon Death, Disability, or Bankruptcy
If a shareholder dies or becomes incapacitated, their shares may pass to heirs who lack business knowledge or alignment with the remaining shareholders. Without a buy-sell clause or succession plan, the company may face disruption, loss of control, or family conflict.
5. Lack of Clarity on Decision-Making and Voting Rights
Some corporations issue different classes of shares with varied voting and dividend rights. In the absence of a shareholders’ agreement, disputes can arise over who controls what, particularly in closely held corporations. A clear agreement allocates decision-making authority and protects minority shareholders.
6. Financing and Investment May Be Impacted
Lenders, investors, and venture capitalists often expect to see a shareholders’ agreement as part of corporate due diligence. Operating without one may reduce the company’s credibility and limit its ability to attract capital or secure financing.
7. No Defined Exit Strategy for Shareholders
If one shareholder wants to exit, there may be no agreed process to determine share valuation or facilitate the sale. This creates friction and uncertainty for both the departing and remaining shareholders. A shareholders’ agreement often includes clear buyout terms, valuation methods, and timelines.
How Ontario Law Handles Disputes Without an Agreement
Under the Ontario Business Corporations Act, minority shareholders can bring an oppression remedy application if they believe their interests are unfairly disregarded. However, this is a costly and time consuming legal process. Without a shareholders’ agreement, this may be the only recourse an expensive and unpredictable route for resolving internal conflict.
Best Time to Put a Shareholders’ Agreement in Place
The optimal time to sign a shareholders’ agreement is early ideally at or shortly after incorporation, before any major disagreements arise. It’s also a good idea to revisit and update the agreement when new shareholders join, the business expands, or financing arrangements change.
How Hadri Law Can Help
Hadri Law regularly assists Ontario corporations with drafting and reviewing shareholders’ agreements that reflect their unique ownership structures, business goals, and risk tolerance. We work closely with founders, directors, and shareholders to ensure all key matters are addressed and everyone’s interests are protected.
Our legal services include:
- Drafting shareholders’ agreements for new or existing corporations
- Reviewing and updating outdated agreements
- Advising on share classes, transfer restrictions, and voting rights
- Implementing buyout provisions and valuation methods
- Assisting with disputes or negotiations involving shareholders
Conclusion
Operating without a shareholders’ agreement exposes a corporation to avoidable risk. Whether your company is newly incorporated or has been running for years, putting a shareholders’ agreement in place is a proactive step toward legal clarity and long-term business success.
To learn how Hadri Law can support your corporate governance and shareholder relationships, book a free consultation or call us today @ 437 974 2374 Email: contact@hadrilaw.com
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