Understanding the Hierarchy of Corporate Governance Documents in Ontario
In Ontario, corporate governance is shaped by several key documents: the articles of incorporation, corporate bylaws, and any shareholders’ agreement. Each serves a distinct legal purpose, but when conflicts arise between them, business owners often wonder which document takes precedence, especially between a shareholders’ agreement and the corporation’s internal records.
What Is a Shareholders’ Agreement?
A shareholders’ agreement is a private contract between some or all shareholders of a corporation. It can set out a wide range of rights and obligations regarding the management of the company, decision-making processes, exit strategies, share transfers, dividend policies, and dispute resolution mechanisms.
Unlike articles and bylaws, which are internal governing documents required under the Ontario Business Corporations Act (OBCA), a shareholders’ agreement is not mandatory. However, it is commonly used—especially in closely held corporations to clarify how decisions will be made and how shareholder relationships will be governed beyond what is provided by default in the OBCA or in the corporate bylaws.
Articles and Bylaws: What They Cover
The articles of incorporation are filed with the Ministry and establish key structural elements of the corporation, such as its name, share classes, registered office, and any special provisions. The bylaws are passed by the board of directors and govern internal administrative matters, including quorum, voting procedures, officer roles, and meeting protocols.
While articles and bylaws are binding on all shareholders and directors, they operate within the framework of the OBCA and are publicly accessible upon request.
When a Shareholders’ Agreement Conflicts with Articles or Bylaws
Under Ontario law, the shareholders’ agreement can override or modify the effect of the articles or bylaws, but only in specific circumstances and with certain limitations.
Section 108 of the OBCA expressly permits a unanimous shareholders’ agreement (USA) to restrict, in whole or in part, the powers of the directors to manage or supervise the management of the business and affairs of the corporation. In doing so, the agreement can effectively transfer some governance powers from directors to shareholders. This includes decision-making normally governed by the bylaws or articles.
Where a shareholders’ agreement is not unanimous, its enforceability may be limited to the parties who signed it, and it cannot bind or override statutory obligations under the OBCA. Any provisions in the shareholders’ agreement that conflict with mandatory provisions of the OBCA or public policy may be unenforceable.
Best Practices to Avoid Conflict
To avoid inconsistency and legal uncertainty, shareholders should take the following steps when drafting or reviewing a shareholders’ agreement:
Review the existing articles and bylaws for potential overlap or contradiction
Ensure the agreement complies with the OBCA and does not attempt to override mandatory corporate law provisions
Consider making the agreement unanimous if governance powers are being reassigned
Consult legal counsel before amending articles or enacting new bylaws that may conflict with the agreement
Maintain consistency in definitions, voting thresholds, and processes across all governance documents
Enforceability and Legal Remedies
Where a properly drafted shareholders’ agreement exists and is unanimous, Ontario courts have consistently upheld its precedence in governance matters, provided it does not violate statutory obligations. If a conflict arises and a party acts contrary to the agreement, legal remedies such as specific performance, injunctive relief, or damages may be available.
However, if a shareholder challenges the enforceability of a non-unanimous agreement or its ability to override articles or bylaws, courts may limit its effect or rule certain provisions unenforceable.
Conclusion
In Ontario, a properly structured and unanimous shareholders’ agreement can, in many cases, take precedence over a corporation’s articles or bylaws, especially when it comes to internal governance and shareholder rights. However, this is not absolute. Careful drafting and consistency across corporate documents are essential to ensure clarity and enforceability.
If you are establishing or restructuring a corporation in Ontario, or if your shareholders’ agreement may conflict with your existing corporate records, Hadri Law can help you assess, revise, and strengthen your governance framework. Call us today 437 974 2374 Email: contact@hadrilaw.com or book a free consultation.