What is a Unanimous Shareholder’s Agreement?
A Unanimous Shareholder’s Agreement (“USA”) is distinct from the company’s constitution or its articles. Without a USA, the Company would be controlled solely and exclusively by the exercise of shareholder or directorship rights through its constitution and the business corporations legislation of its home jurisdiction, which are generally insufficient to protect the rights and interests of minority shareholders. The legislation and articles normally set out minimum criteria for the shareholders to deal with one other, and they are certainly not a one size fits all solution.
A USA establishes, by enforceable agreement, the rights and obligations of shareholders of a company, and it commonly covers matters governing the management and structure, initial and continuing funding, as well as the administration and business activities of the Company. As you may infer from the title of the document (and since it is an agreement), the USA must be signed by all registered shareholders of the Company, as well as by the Company, and in the case of a conflict between the terms of the articles and the terms of the USA, the USA prevails.
A USA is a significant and useful document, because it provides a mechanism for setting out the principles upon which the shareholders or partners in a joint enterprise agree to run their business. Closely held corporations oftentimes do not initially have a USA, but as non-related parties become shareholders, it is generally a good idea to consider a USA to better set out how those shareholders will interact with one another.
Some people view a USA as the corporate equivalent to a Limited Liability Company’s (LLC) Operating Agreement. As a starting point, that is not a bad way to think about it, but, generally, LLCs have more options available to them in terms of what can be included in an enforceable operating agreement than is the case with a USA. While many states, like Arizona, are amending their LLC legislation to provide for minimum expectations for how LLCs will be governed and how interest holders may interact with one another, LLC legislation is not as comprehensive as corporate legislation, perhaps largely owing to the fact that corporations are often the choice for widely disparate shareholders, while LLCs are normally the business entity of choice for related or non-arms’ length interest holders.
What is covered by a Shareholder’s Agreement?
Usually such an agreement includes things like the following:
The Appointment and Removal of Directors
Shareholder restrictions and the transfer of shares
Resolution of deadlock situations
Addition of New Shareholders
Restrictions on Company Activities
Duty of Shareholder to act in good faith
Business Plan of the Company
Non-Competition/Solicitation
Why Should You Want a USA?
Through the USA, you can better protect the rights of minority shareholders, quickly resolve deadlocks between shareholders, regulate the rights of entry or exit of shareholders in the Company, and establish (in advance) methods of valuation of the fair market value of the shares of the Company. Because the USA has the additional advantage of not being available to the public, unlike the Company’s constitution/articles, sensitive details regarding the role of the parties in the Company’s management, their rights and obligations, and other considerations may be set out in the USA. Shareholders must all consent to the terms of a USA for it to be effective, but, once in place, the USA will serve as a significant governing document for the corporation’s affairs going forward. Because of the significant effect of the USA, if you are considering purchasing shares in a corporation, you should make sure that you have read and agree to the terms of the USA, if it exists, and address any terms with which you may have concern before you purchase those shares.