Shareholder Agreements Under the CBCA: What Every Owner Must Know

Two friends start a business together and incorporate federally under the Canada Business Corporations Act. Three years later, the business is thriving, and the partnership is not. One wants to sell outright, the other wants to keep building, and neither can force the other to do anything, because nothing was ever put in writing about what happens when they disagree.

Incorporating under the CBCA gives a business a legal structure. It does not tell two or more owners what to do when they want different things. That is the job of a shareholder agreement, and every owner of a private CBCA corporation should understand what one can do before a disagreement forces the question.

What the CBCA actually says

The CBCA does not require private corporations to have a shareholder agreement, and it does not supply one by default. Absent an agreement, directors run the business, shareholders elect them and vote on a short list of fundamental matters, and ownership carries no automatic right to be bought out and no protection against being outvoted. A shareholder agreement is a private contract that fills that gap, letting owners decide in advance how to handle the situations a growing business runs into.

Ordinary agreement or unanimous shareholder agreement

These two terms are often assumed to mean the same thing. They do not. An ordinary shareholder agreement is a contract between some or all shareholders. It can cover almost anything the parties agree to, but it cannot take management authority away from the board, because that authority belongs to the directors under the Act.

A unanimous shareholder agreement, or USA, is a specific creature of section 146 of the CBCA. It must be signed by every shareholder, and in exchange it can restrict the directors' powers and shift them, with the matching duties and liabilities, to the shareholders. A person who later buys shares subject to a USA is bound by it if given proper notice, and has thirty days to undo the purchase if notice was not given. Most owners of a closely held business do not need to go this far. An ordinary agreement that governs transfers and buyouts without touching the board's authority is usually enough.

What a strong agreement actually covers

A good agreement usually addresses the same recurring questions. A right of first refusal lets existing owners match any outside offer before a stranger buys in. Drag-along and tag-along rights protect majority and minority owners when the company is eventually sold. A workable valuation method, agreed before anyone needs it, prevents a fight over what the shares are worth at the worst possible time.

Death, disability, divorce, bankruptcy, and simple deadlock are what most often force a buyout, and each benefits from its own agreed process. A shotgun clause, where one owner names a price, and the other must buy or sell at it, is a common way to break a deadlock without going to court. Good agreements also set decision thresholds for major moves, a preference for mediation or arbitration over litigation, and restrictive covenants for a departing owner.

A related duty every CBCA owner should know

Separate from the agreement, every private CBCA corporation has had to keep a register of individuals with significant control since 2019. Since amendments that came into force on January 22, 2024, corporations must also file that information with Corporations Canada each year with their annual return, and again within fifteen days of any change. Part of it is now public, and falling behind carries real financial exposure. This sits on top of, not instead of, whatever the owners have agreed among themselves.

Back to the two friends

A shotgun clause or an agreed valuation method would have given our two owners a way to separate on defined terms instead of an open-ended standoff. A shareholder agreement does not prevent owners from disagreeing. It decides, while everyone is still getting along, exactly what happens when they do.

Frequently asked questions

Does the CBCA require a shareholder agreement?

No, and many private corporations operate for years without one. The risk is not illegality, it is having no plan for when owners eventually disagree.

Can a shareholder agreement override the board of directors?

Only a unanimous shareholder agreement under section 146 can restrict the directors' powers, and only if every shareholder signs it.

This article provides general information about Canadian corporate law and does not constitute legal advice. We recommend speaking with our corporate team before relying on a shareholder agreement for your business.