What Happens If You Do Not Have a Shareholders’ Agreement in Ontario?
Many corporations begin without a shareholders’ agreement.
Two friends, relatives, colleagues, or business partners decide to start a company together. They agree on the general direction of the business, divide the shares, and begin operating. Because everyone is getting along, a formal agreement may feel unnecessary.
The problems often emerge later.
One shareholder may stop contributing. The owners may disagree about salaries, dividends, hiring, financing, or the direction of the company. A shareholder may want to leave, sell their shares, or bring a family member into the business. Another may become ill, pass away, or experience financial difficulties.
Without a shareholders’ agreement, the owners may discover that they have no practical process for resolving these issues.
Ontario corporate law provides a general legal framework, but it does not create a customized plan for the specific relationship between the shareholders. A properly drafted shareholders’ agreement can establish that plan before a disagreement threatens the business.
Is a Shareholders’ Agreement Legally Required in Ontario?
Ontario corporations are not generally required to have a shareholders’ agreement.
A corporation can legally operate using its articles, bylaws, corporate resolutions, share provisions, and the applicable legislation. However, these documents often do not address the detailed commercial arrangements between the owners.
For example, standard corporate documents may not explain:
What each shareholder is expected to contribute
Whether shareholders must work in the business
How salaries and bonuses will be determined
When dividends will be paid
What happens if an owner stops working
How a shareholder can leave the company
How shares will be valued in a buyout
What happens when the shareholders cannot agree
Whether shares can be transferred to another person
What happens if a shareholder dies or becomes disabled
How the owners will approve major business decisions
Whether a majority shareholder can force a sale of the company
A shareholders’ agreement is intended to address these practical questions.
Ontario law also permits shareholders to enter into agreements governing how their shares will be voted. A unanimous shareholders’ agreement can go further by restricting some or all of the directors’ powers to manage or supervise the corporation. Shareholders who assume those powers may also assume corresponding director duties and liabilities.
Because these agreements can change how a corporation is governed, they should be carefully drafted for the particular company and its shareholders.
What Governs the Corporation Without a Shareholders’ Agreement?
If there is no shareholders’ agreement, the shareholders must generally rely on:
The Ontario Business Corporations Act or applicable federal legislation
The corporation’s articles of incorporation
The corporation’s bylaws
The rights attached to each class of shares
Resolutions approved by the directors and shareholders
Employment, contractor, loan, or other commercial agreements
General principles of contract, corporate, and equitable law
These sources can determine the shareholders’ legal rights, but they may not provide an efficient solution to a business dispute.
The result can be uncertainty. The parties may agree about who legally owns the shares but disagree about what the ownership relationship was supposed to involve.
1. A Shareholder May Stop Working but Keep Their Shares
A common misunderstanding is that a shareholder must continue working for the company to retain ownership.
Employment and share ownership are separate legal relationships.
A person may be all of the following:
A shareholder
A director
An officer
An employee
An independent contractor
Ending one role does not necessarily end the others.
For example, terminating a shareholder’s employment does not automatically cancel or transfer their shares. The former employee may remain an owner and continue to benefit from the future growth or sale of the company.
This can be particularly frustrating when the remaining shareholders are doing all the work while an inactive shareholder continues to own a substantial percentage of the business.
A shareholders’ agreement can address this risk through provisions dealing with:
Mandatory share sales following termination
Good-leaver and bad-leaver rules
Vesting or reverse-vesting arrangements
Valuation discounts in defined circumstances
Resignation from director and officer positions
Payment terms for a compulsory buyout
These provisions must be drafted carefully. An overly punitive clause may create enforceability concerns or lead to further disputes.
2. You May Not Be Able to Simply Remove a Shareholder
Business owners frequently ask whether they can “remove” a shareholder who is disruptive, underperforming, or no longer involved.
A shareholder owns property in the form of shares. The other owners cannot normally take those shares away simply because the relationship has deteriorated.
Depending on the corporation’s governing documents and share structure, it may be possible to remove the individual as an employee, officer, or director. Under Ontario legislation, shareholders can generally remove a director by ordinary resolution, subject to statutory and corporate-document exceptions. However, removing someone as a director does not by itself eliminate that person’s share ownership.
Without an agreed buyout mechanism, the company or remaining shareholders may have no straightforward way to purchase the departing person’s shares.
This is one reason a shareholders’ agreement should distinguish clearly between:
Employment
Management authority
Board participation
Voting rights
Economic ownership
Share-transfer obligations
3. A 50/50 Company Can Become Deadlocked
A corporation owned equally by two shareholders can function well when the owners agree. When they disagree, neither side may have enough voting power to make a decision.
This is known as a shareholder deadlock.
Deadlocks may arise over:
Hiring or terminating employees
Entering a major contract
Taking on new debt
Paying salaries or dividends
Leasing or purchasing property
Admitting a new owner
Issuing additional shares
Changing the direction of the company
Selling the business
Closing the company
A prolonged deadlock can prevent the corporation from making ordinary business decisions. Employees, customers, lenders, and suppliers may become concerned about the company’s stability.
A shareholders’ agreement can establish a staged process for dealing with deadlocks, such as:
Negotiation between designated representatives
A formal meeting with written proposals
Mediation
Arbitration for defined disputes
A buy-sell process
A sale of the company
Dissolution as a last resort
The correct mechanism depends on the business and the financial strength of the shareholders. Certain buy-sell clauses can unfairly favour the shareholder with greater access to capital, so they should not be inserted without considering the likely consequences.
4. There May Be No Clear Way for a Shareholder to Leave
A shareholder who wants to leave may assume that the company or the other shareholders must buy their shares.
That is not necessarily the case.
Unless a contract, the corporation’s articles, or another legal right requires a purchase, the other owners may not be obligated to buy the departing shareholder’s interest. At the same time, a private corporation’s shares may be difficult to sell to an outside buyer.
This can leave a shareholder trapped in the company.
A shareholders’ agreement can establish:
Voluntary withdrawal rights
Mandatory buyout events
Rights of first refusal
Rights of first offer
Permitted transfers
Notice requirements
Valuation procedures
Payment timelines
Security for deferred payments
Closing requirements
Without these terms, the parties may disagree not only about the price but also about whether a buyout must occur at all.
5. The Shareholders May Disagree About the Value of the Business
Even where the owners agree that one shareholder should be bought out, they may have very different views of what the shares are worth.
One shareholder may focus on revenue or future growth. Another may focus on current profits, business debt, or the company’s dependence on the remaining owner.
Further disagreements can arise over:
Whether a minority discount should apply
Whether a marketability discount should apply
How goodwill should be valued
Whether shareholder loans are included
Which valuation date should be used
Whether life insurance proceeds affect the price
Whether the departing shareholder’s conduct affects the valuation
Whether the company or the remaining shareholders will make the purchase
A shareholders’ agreement can establish a valuation process before the parties know who will eventually be the buyer or seller.
Possible approaches include:
A fixed value updated annually
A formula based on earnings or revenue
Fair market value determined by a business valuator
Competing valuations with a process for resolving differences
A valuation method tailored to the company’s industry
The agreement should also explain who selects the valuator, who pays the valuation costs, what information must be provided, and whether the determination is binding.
6. Shares Could Be Transferred to an Unwanted Person
Without appropriate restrictions, a shareholder may attempt to sell or transfer shares to an outside party.
The proposed new owner could be:
A competitor
A former employee
A family member
An investor with different objectives
A person with whom the remaining shareholders do not want to work
The corporation’s articles may already restrict share transfers, but a restriction alone does not necessarily create a complete process for approving, pricing, and completing a transfer.
A shareholders’ agreement can provide the other shareholders with an opportunity to purchase the shares before they are offered to someone else. It can also specify permitted transfers, such as transfers to a family trust or holding company, subject to appropriate conditions.
The agreement should coordinate with the corporation’s articles and other corporate records. Delta Law’s corporate law services can assist Ontario businesses with corporate structuring, governance documents, reorganizations, and shareholder arrangements.
7. Death or Disability Can Create an Ownership Crisis
If a shareholder dies, their shares do not simply disappear. They will generally form part of the deceased shareholder’s estate, subject to the company’s governing documents and any binding agreements.
The remaining owners may find themselves in business with the deceased shareholder’s estate or beneficiaries. Those beneficiaries may have limited knowledge of the company but still hold significant voting and economic rights.
Disability creates a different challenge. A shareholder may remain alive and continue owning shares but be unable to perform their usual role in the business.
A shareholders’ agreement can address:
Whether death or long-term disability triggers a mandatory buyout
Who purchases the shares
How the shares are valued
How disability is defined
When the purchase is completed
Whether life or disability insurance will fund the transaction
How insurance proceeds are applied
Whether the estate receives a lump sum or instalment payments
Who controls voting rights before the transaction closes
These provisions should be coordinated with estate, tax, insurance, and financial planning.
8. Salary and Dividend Disputes May Escalate
Shareholders who work in the business may receive compensation through salaries, bonuses, dividends, management fees, or a combination of these payments.
Disputes can arise when one shareholder believes another is receiving excessive compensation or personal benefits. Minority shareholders may also be concerned if profits are paid as salaries to the controlling shareholders instead of being distributed as dividends.
Without an agreement, the parties may not have a shared policy for determining:
Shareholder salaries
Performance bonuses
Dividend payments
Expense reimbursements
Vehicle allowances
Benefits
Related-party payments
Management fees
A shareholders’ agreement can require enhanced approval for shareholder compensation and related-party transactions. It can also establish a general dividend policy while preserving the corporation’s need to maintain working capital.
9. Additional Financing Can Lead to Dilution Disputes
Growing companies often require additional capital.
One shareholder may be willing and able to contribute more money while another may not. The shareholders may disagree about whether the funding should be treated as:
A shareholder loan
A new share subscription
Third-party debt
A convertible investment
An advance with interest
A contribution that changes ownership percentages
If the corporation issues additional shares, an existing shareholder’s percentage ownership may be diluted.
A shareholders’ agreement can establish whether shareholders have pre-emptive rights to participate in future share issuances. It can also explain what happens if one shareholder does not contribute to an approved financing round.
These provisions help ensure that everyone understands the potential effect of future funding on ownership and control.
10. Major Decisions May Be Controlled by a Simple Majority
Shareholders often assume that all owners must approve important decisions. In reality, the required approval depends on the legislation, the corporation’s documents, the type of decision, and the voting rights attached to the shares.
A shareholder holding a voting majority may be able to control many ordinary decisions. A minority shareholder may have limited influence even if they contributed significant time, money, relationships, or intellectual property to the company.
A shareholders’ agreement can create a list of fundamental decisions requiring enhanced approval. These are sometimes called reserved matters.
Reserved matters may include:
Issuing new shares
Borrowing above a specified amount
Selling significant assets
Entering unusually large contracts
Changing the nature of the business
Hiring or terminating senior executives
Approving shareholder compensation
Declaring dividends
Purchasing another business
Entering transactions with related parties
Amending the articles or bylaws
Selling or dissolving the company
The agreement should not require unanimous approval for every routine decision.
Doing so can make the company unnecessarily difficult to manage.
11. Intellectual Property and Business Opportunities May Be Disputed
Founders frequently contribute names, designs, software, methods, customer relationships, written materials, processes, or other intellectual property to a new business.
If ownership is not properly documented, disputes can arise over whether the corporation or an individual shareholder owns these assets.
Similar concerns arise when a shareholder:
Starts a competing company
Diverts a customer or opportunity
Uses confidential pricing information
Copies internal documents
Solicits employees
Retains access to company systems after leaving
A shareholders’ agreement may include confidentiality, non-solicitation, intellectual-property, and conflict-of-interest provisions. Depending on the circumstances, separate employment, contractor, intellectual-property assignment, or confidentiality agreements may also be required.
Restrictive covenants must be drafted carefully. Their enforceability depends on their wording, scope, purpose, and surrounding circumstances.
Businesses can review Delta Law’s contract law services for assistance with shareholders’ agreements and other commercial contracts.
12. The Sale of the Business May Be More Difficult
A future purchaser may want to acquire all the shares of the corporation. If one shareholder refuses to sell, the transaction may become more complicated or may fail entirely.
A shareholders’ agreement can include drag-along rights. These rights may allow shareholders holding a specified percentage of the company to require the remaining shareholders to participate in an approved sale on the same terms.
The agreement can also include tag-along rights. These may allow minority shareholders to participate when a controlling shareholder sells their shares to a third party.
Without properly drafted sale provisions:
A minority shareholder may block a desirable sale
A controlling shareholder may sell their interest while leaving the minority behind
The parties may dispute how sale proceeds should be allocated
A purchaser may reduce its offer because it cannot obtain complete ownership
Shareholders may face inconsistent representations, warranties, or liabilities
These clauses require careful attention to thresholds, notice, purchase terms, transaction costs, and the responsibility for claims made after closing.
13. Minority Shareholders May Have to Rely on Statutory Remedies
A minority shareholder without contractual protections may have to rely on rights available under corporate legislation.
Ontario’s oppression remedy allows a complainant to seek relief where corporate conduct is oppressive, unfairly prejudicial, or unfairly disregards the interests of specified persons. Courts have broad remedial authority, but oppression proceedings can be complex, fact-specific, time-consuming, and expensive.
A shareholders’ agreement cannot eliminate every possible dispute or prevent a shareholder from exercising statutory rights. However, it can create clearer expectations about governance, information rights, compensation, financing, and exits.
Clear expectations can reduce the likelihood that ordinary business disagreements escalate into litigation.
14. Litigation or Dissolution May Become the Last Resort
When shareholders cannot negotiate an exit and no contractual dispute-resolution process exists, litigation may become one of the few available options.
Depending on the facts, parties may seek:
An oppression remedy
An injunction
A declaration concerning legal rights
An order requiring or restricting certain conduct
A court-supervised buyout
Damages
Winding up or dissolution of the corporation
Ontario legislation permits a court to order the winding up of a corporation in certain circumstances, including some cases involving oppression, unfair prejudice, unfair disregard, or where winding up is just and equitable.
Court proceedings should not be treated as a substitute for advance planning. Even a successful litigant may spend substantial time and money resolving a dispute that could have been addressed through a carefully drafted agreement.
Can You Create a Shareholders’ Agreement After Incorporation?
Yes. A shareholders’ agreement can be created after the corporation has already been formed.
In fact, many corporations operate for months or years before adopting one.
The best time to negotiate the agreement is while the shareholders are cooperating and communication remains constructive. It is easier to discuss difficult hypothetical events before anyone knows who might benefit from a particular clause.
The process will commonly involve:
Reviewing the corporation’s articles, bylaws, minute book, and share register
Confirming the issued shares and ownership percentages
Identifying each shareholder’s role and expectations
Discussing management and approval rights
Establishing funding obligations
Selecting appropriate transfer and buyout provisions
Creating a valuation process
Addressing death, disability, retirement, and termination
Coordinating the agreement with tax, insurance, and estate planning
Approving any necessary corporate resolutions or related agreements
The shareholders should obtain appropriate legal and tax advice before finalizing the arrangement.
Can You Negotiate an Agreement After a Dispute Begins?
It may still be possible, but it is usually more difficult.
Once a dispute begins, every proposed clause may be viewed through the lens of the current conflict. The parties may no longer trust each other, and one side may believe that a proposed agreement unfairly changes the existing balance of power.
Depending on the circumstances, the parties may need to negotiate:
An interim governance arrangement
A standstill agreement
A division of management responsibilities
Access to financial information
A voluntary share purchase
A structured separation
A settlement agreement
A new shareholders’ agreement governing the ongoing relationship
Each shareholder may need independent legal advice, particularly where their interests have diverged.
Are Articles and Bylaws a Substitute for a Shareholders’ Agreement?
Not usually.
The corporation’s articles establish fundamental features such as its authorized share classes and the rights, privileges, restrictions, and conditions attached to those shares.
Bylaws generally address internal procedures such as director and shareholder meetings, officer appointments, and signing authority.
A shareholders’ agreement focuses more directly on the relationship between the owners. It can address matters such as participation in the business, approval rights, funding, transfers, buyouts, valuation, confidentiality, and dispute resolution.
These documents should work together. Conflicting documents can create ambiguity and increase the risk of a dispute.
What Should You Do If Your Company Has No Shareholders’ Agreement?
Business owners should begin by confirming the company’s existing legal structure and records.
Relevant documents may include:
Articles of incorporation and amendments
Corporate bylaws
Share certificates
Securities registers
Director and shareholder resolutions
Share subscription documents
Shareholder loan records
Employment and contractor agreements
Intellectual-property assignments
Financing documents
Tax and accounting records
Existing agreements between the owners
The shareholders should then discuss unresolved questions, including:
Who owns what percentage of the company?
What is each shareholder expected to contribute?
Who manages daily operations?
Which decisions require enhanced approval?
How will future financing be handled?
What happens if someone stops working?
How can an owner leave?
How will shares be valued?
What happens following death or disability?
How will deadlocks be resolved?
What happens if someone wants to sell the business?
The goal is not simply to produce a generic document. The agreement should reflect how the corporation actually operates and how the owners want it to operate in the future.
Is an Online Shareholders’ Agreement Template Enough?
A template may help identify common subjects, but it may not reflect:
The corporation’s share structure
Different classes of shares
Industry-specific regulatory obligations
Unequal capital contributions
Personal guarantees
Shareholder loans
Existing tax planning
Family ownership considerations
Different management roles
The shareholders’ relative financial resources
The corporation’s articles and bylaws
The parties’ intended exit strategy
A clause that is suitable for one corporation may create an unfair or impractical result for another.
For example, an automatic buy-sell mechanism may appear balanced because either shareholder can initiate it. In practice, it may strongly favour the shareholder who can obtain financing quickly.
Legal drafting should account for the real commercial relationship, not only the percentage of shares held by each person.
The Cost of Waiting
A shareholders’ agreement may seem less urgent when the owners are getting along.
Unfortunately, it becomes much harder to negotiate once a shareholder wants to leave, stops contributing, becomes ill, or begins challenging business decisions.
At that stage, every unresolved question can become a source of leverage:
Who controls the company?
Who owns the customers or intellectual property?
Can the inactive shareholder be bought out?
What are the shares worth?
Who pays for the valuation?
Can the business be sold?
Can either owner start a competing business?
Who is responsible for corporate debt or personal guarantees?
The legal and operational cost of resolving these issues after a relationship breaks down can greatly exceed the cost of establishing clear rules in advance.
For more practical information about contracts, corporations, and protecting an Ontario business, visit Delta Law’s legal resources.
This article provides general information only and does not constitute legal advice. Corporate and contractual rights depend on the corporation’s documents, applicable legislation, and the specific facts of each situation.
Put an Agreement in Place Before a Dispute
If your Ontario corporation has more than one shareholder, a carefully drafted shareholders’ agreement can clarify ownership expectations, protect the business, and create a practical process for dealing with exits, deadlocks, transfers, and unexpected events.
Delta Law assists Ontario businesses with shareholders’ agreements, corporate governance, and commercial contracts tailored to their ownership structure and goals.
