When Shareholder Agreements Override the OBCA — And When They Don't

Shareholder agreements are powerful tools that can customize how an Ontario corporation operates. However, they cannot override everything in the Ontario Business Corporations Act (OBCA). This article explains when shareholder agreements can override the OBCA and when they cannot.

The General Principle

Shareholder agreements are contracts between shareholders that can modify certain default rules in the OBCA. However, the OBCA contains both:

• Default rules that can be overridden by agreement
• Mandatory provisions that cannot be overridden

Understanding the difference is crucial for both drafting and interpreting shareholder agreements.

What Shareholder Agreements Can Override

Default Shareholder Rights

Many shareholder rights in the OBCA are defaults that can be modified by agreement, including:

• Voting rights (subject to certain limitations)
• Rights to receive dividends
• Rights to receive information
• Rights to transfer shares
• Procedures for shareholder meetings

Default Director Powers

Shareholder agreements can restrict or modify director powers, including:

• Decision-making authority
• Powers to issue shares
• Powers to declare dividends
• Powers to enter into contracts

Corporate Governance Procedures

Shareholder agreements can establish procedures for:

• Calling meetings
• Quorum requirements
• Voting procedures
• Dispute resolution

What Shareholder Agreements Cannot Override

Mandatory Statutory Rights

The OBCA contains certain rights that are mandatory and cannot be overridden, including:

The Right to Oppression Remedy

Shareholders always have the right to seek an oppression remedy under the OBCA, regardless of what a shareholder agreement says. This is a fundamental protection that cannot be waived.

Basic Corporate Existence

Shareholder agreements cannot override fundamental requirements for corporate existence, such as:

• The requirement to have at least one director
• The requirement to have at least one shareholder
• Basic corporate formalities

Fiduciary Duties

Directors’ fiduciary duties to the corporation cannot be eliminated by shareholder agreement, though the agreement may affect how those duties are exercised.

Public Policy Limitations

Some provisions cannot be overridden because they would violate public policy, such as:

• Provisions that would allow illegal activities
• Provisions that would harm creditors
• Provisions that would circumvent regulatory requirements

Unanimous Shareholder Agreements (USAs)

A unanimous shareholder agreement (USA) is a special type of shareholder agreement that can transfer powers from directors to shareholders. However, even USAs have limits:

What USAs Can Do

USAs can:

• Restrict the powers of directors
• Transfer decision-making authority to shareholders
• Modify corporate governance structures

What USAs Cannot Do

USAs cannot:

• Eliminate all director duties
• Override mandatory statutory rights (like the oppression remedy)
• Violate public policy
• Eliminate fundamental corporate requirements

Common Scenarios

Scenario 1: Share Transfer Restrictions

Can a shareholder agreement restrict share transfers? Yes. Shareholder agreements commonly restrict share transfers, requiring consent or offering rights of first refusal. These restrictions are generally enforceable.

Scenario 2: Removing Director Powers

Can a shareholder agreement remove all director powers? Partially. A USA can restrict director powers and transfer them to shareholders, but some basic requirements remain.

Scenario 3: Waiving the Oppression Remedy

Can a shareholder agreement waive the right to seek an oppression remedy? No. This is a mandatory statutory right that cannot be waived.

Scenario 4: Modifying Voting Rights

Can a shareholder agreement modify voting rights? Generally yes, but there are limits. For example, certain fundamental decisions may require specific voting procedures that cannot be completely eliminated.

Drafting Considerations

Be Specific

Vague shareholder agreements can lead to disputes. Be specific about:

• What is being modified
• How it’s being modified
• What happens if the agreement conflicts with the OBCA

Consider Unanimous Shareholder Agreements

If you want to significantly modify corporate governance, consider whether a USA is appropriate. USAs have special legal status and can transfer powers from directors to shareholders.

Include Conflict Clauses

Include clauses that address what happens if the agreement conflicts with the OBCA or corporate articles. Generally, the agreement should specify that it prevails to the extent permitted by law.

Plan for Disputes

Include dispute resolution mechanisms, but remember that parties always retain the right to seek an oppression remedy, regardless of what the agreement says.

Common Pitfalls

Assuming Everything Can Be Overridden

Many people assume shareholder agreements can override everything in the OBCA, but this is not true. Mandatory provisions always apply.

Not Understanding USA Requirements

USAs have specific requirements (they must be unanimous, must be in writing, etc.). Failing to meet these requirements can invalidate the agreement.

Conflicting with Articles of Incorporation

Shareholder agreements should be consistent with the articles of incorporation. Conflicts can create uncertainty and legal problems.

Not Updating the Agreement

As the corporation grows and changes, the shareholder agreement may need to be updated. Outdated agreements can cause problems.

Key Takeaways

• Shareholder agreements can override many default OBCA provisions but not mandatory ones
• The oppression remedy is a mandatory right that cannot be waived
• Unanimous shareholder agreements have special status and can transfer powers from directors to shareholders
• Public policy limits what can be overridden
• Specific, well-drafted agreements are more likely to be enforceable

Related Content

• Corporate & Business Law in Ontario
• Case Study: Alex — Shareholder Dispute Despite an Agreement
• ISC Register: What Ontario Corporations Need to Know About Shareholder Information Requirements

This article is for informational purposes only and does not constitute legal advice. Every situation is unique, and the information here may not apply to your specific circumstances. For advice tailored to your situation, consult with a qualified legal professional licensed to practice law in Ontario.