The USA is formed under Section 146 of the Canada Business Corporations Act (CBCA). Unlike Shareholder Agreements, a USA is a contract amongst all the shareholders that restricts the managerial powers of the board of directors of the corporation. A USA is a written agreement between the shareholders of the corporation that sets out individual and collective rights and responsibilities.
Who needs a USA and why is it important?
USAs are necessary for those corporations that have multiple shareholders and want to make sure that the key corporate decisions are made collectively. A well-drafted USA helps shareholders to make decision that focus on the growth of the company and sets out clear expectations from the start. It helps mitigate risks, minimize disputes, protect shareholder interests and ensures smooth business operations by providing governance mechanisms.
Key Terms under USA
USAs should be customized to your corporations needs and wants. Drafting an USA require expertise and knowledge to determine which elements are necessary to cater to the corporation’s needs. The knowledge required is not readily available and it most definitely is not a “one size fits all” agreement. The following is a non-exhaustive list of terms that are important to consider while drafting a USA:
1. Key People and their roles and responsibilities
The most important aspect of drafting a USA is to consider specifying the number of directors, restrictions on directors’ powers, distribution of profits, meeting procedures and roles and responsibilities of these key people.
2. Pre-Emptive Rights
This protects shareholders from the dilution of their ownership stakes in the company. Also, if the company issues new shares in the open market, under the pre-emptive clause the existing shareholders are entitled to buy these shares before anyone else. The USA will also provide the procedure to use this right.
3. Right of first refusal
A shareholder that received an offer from the third-party purchaser has to give notice of offer to the other shareholders as well. The other shareholders have a choice to match the third party offer and purchase the shareholder’s shares within a stipulated period of time. If they don’t, the shareholder who originally received the offer from the third party can sell their shares to the third party. The right to first refusal includes two special rights for shareholders:
a. Tag-along rights: this means that the other shareholders can tag along with the shareholder that is selling its shares to the third party.
b. Drag-along rights: this means that if third party offers to buy the controlling shareholders’ shares, the drag along right entitles them to force all other shareholders to sell or approve the modification of corporate control. Thus, this right gives controlling shareholders dominance.
6. Share Valuation
The share valuation is one of the key considerations while drafting a USA as it avoids valuation disputes between the shareholders. This clause should include the periodic determination of the share value and should set out how the share valuation will be decided.
To conclude, it is important to contact an experienced corporate lawyer that can assist you with a well-drafted USA that will help govern the relationships amongst the shareholders, directors and corporations, and avoid future conflicts.