Shareholder Agreements - The Law Society of Saskatchewan

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Corporate Commercial Section 6 Shareholder Agreements 2009 © The Law Society of Saskatchewan Share Issue and Transfers Section 25(1) of the SBCA recognizes that the articles, bylaws or a USA can regulate the timing of share issues and the conditions or restrictions applying to the sale of shares. Section 28 permits the articles to provide for a pre-emptive right on the issue of shares. It restricts the scope of pre-emptive rights conferred by the articles if shares are to be issued for nonmonetary consideration, as a share dividend, or pursuant to conversion rights or options. The articles or a USA can set out restrictions on share transfers (section 6(2)), subject to transfer or pre-emptive rights which are included in the articles, an amendment to the articles to "add, remove or change prejudicially" transfer or pre-emptive rights gives rise to a right of dissent and appraisal (sections 170 and 184). Division XV of the SBCA gives a right of compulsory acquisition on a takeover bid. This is not restricted to "distributing corporations". A purchaser of 90 percent of the shares can force the acquisition of the remaining shares of a non-distributing corporation. However, the USA may provide for a higher percentage. Corporate repurchases are governed by section 32 of the SBCA. General “Buy-Sell” and “Shotgun” Provisions Often the most used provisions of a USA are the share transfer (or restrictions on share transfer) provisions. These can include many forms: • granting shareholders a pre-emptive right to acquire shares the corporation is issuing from treasury; • providing shareholders a right of first refusal to acquire shares being sold by an existing shareholder; • mandatory transfer provisions, forcing a shareholder to sell his or her shares on the occurrence of certain triggering events; • shot-gun clauses; and • other more complex share transfer rights including puts, calls, bring-along and tag-along rights. Each of these are discussed in more detail below. Corporate–6–8 Saskatchewan CPLED Program
Corporate Commercial Section 6 2009 © The Law Society of Saskatchewan Shareholder Agreements Pre-emptive Rights It is often a surprise that absent some pre-emptive rights in a USA, shareholders do not possess a right to purchase treasury shares being issued by the corporation. Generally, USA’s provide that shareholders have a pro rata pre-emptive right to acquire new shares being issued by the corporation from treasury, thus giving shareholders the right to preserve their relative proportion of equity in the corporation. In the event that not all shareholders exercise their pre-emptive rights, some USA’s allow shareholders to take up excess shares prior to such shares being offered to third parties. Right of First Refusal Many USA's provide that no shareholder may sell his or her shares without first offering them to existing shareholders and/or the corporation on a pro rata basis. The general rule is that shares will only be sold to outsiders if the existing shareholders (or the corporation) are unwilling to purchase the shares of the offeror. These provisions represent an attempt to balance the control of ownership desired in closely-held corporations with the desire to provide some market or liquidity to shareholders of such corporations. However, in general, for the vast majority of private corporations, there is very little, if any, market for these shares. Mandatory Transfers Often USAs will provide for a forced or automatic sale of a shareholder’s shares in the event one of a number of listed events occur. Among the more common events include the death, disability or bankruptcy of a shareholder, the institution of matrimonial proceedings by a shareholder or the spouse of a shareholder, the finding of mental incompetency of a shareholder, or the cessation of employment of a shareholder by with the corporation. Mandatory share transfers may also be triggered by a default by a shareholder in his or her obligations under the USA, such as complying with cash calls, guaranteeing debt of the corporation, or others. These clauses often go into considerable detail regarding the procedure and terms for the purchase and sale of shares in these instances, and terms such as share price and payment terms may differ depending on which event triggered the mandatory sale. Saskatchewan CPLED Program Corporate–6–9
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Shareholder Agreements - The Law Society of Saskatchewan

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