Shareholders’ Agreement – The election and composition of the board of directors

In a previous blog post, we provided a brief overview of the benefit of having a shareholders’ agreement, and examples of matters that can be addressed by a shareholders’ agreement.  One of those items is the election and composition of the board of directors.

The election of the board of directors is generally determined by shareholders holding a majority of the voting shares of the corporation.  As a result, if a single shareholder (or group of shareholders) holds 51% or more of the outstanding votes, they can control who gets elected to the board.

A shareholders’ agreement can change the way directors are selected, and in fact, the number of directors who sit on the board.  For example, a shareholders’ agreement can stipulate that there always be three (3) board members.  With respect to the election of directors, the shareholders’ agreement can increase the threshold required to elect directors (for example, 66% of the outstanding votes are required to elect a director), or provide that certain shareholders are entitled to nominate a certain number of directors (for example, holders of the Class A Common Shares are entitled to appoint one director, or Shareholder X can appoint one director).  In companies with institutional shareholders, shareholders’ agreements can also provide shareholders with board observer rights, or describe the composition of board committees.

A shareholders’ agreement can also provide a mechanism to break a deadlock if there are an even number of directors and they cannot agree, or describe quorum and voting thresholds for director meetings.

By changing the election of the directors, a shareholders’ agreement can allow shareholders to agree amongst themselves how directors will be elected, instead of leaving it to a simple majority decision.

Thinking of putting a shareholders’ agreement in place for your company?  Contact us.

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This blog post is intended to provide general information and does not constitute legal advice. You should consult a lawyer for advice regarding your individual situation.

Every effort has been made to ensure the contents of the blog post were accurate as of the date it was written, however, the law can change and we cannot guarantee that the information remains accurate.  In addition, because the comments above are of a general nature, they may not apply for every situation.  If you have questions, please contact us and we would be happy to discuss your individual circumstances, and whether there have been any changes to the law that would affect the information presented.