A shareholder agreement is a document that generally sets out the rights, privileges, and obligations of a company’s shareholders and the foundation for how a corporation will be established, managed, and run. As such, shareholder agreements are important to both the shareholders of a corporation and the corporation itself.
This is especially true in family-owned businesses, where the number of shareholders may increase from one generation to the next, and where effective shareholder agreements can help avoid conflict. Accordingly, many parents may consider having their child sign a shareholder agreement — but are minor children under 18 years old allowed to sign shareholder agreements?
In Canada, the Canada Business Corporations Act (“CBCA”) and the Ontario Business Corporations Act (“OBCA”) do not expressly prohibit a minor from entering into a shareholder agreement. However, a shareholder agreement is first and foremost a contract, so it must meet all the basic requirements of a binding, legal agreement, including:
- offer and acceptance;
- consideration;
- capacity; and
- a bona fide legal purpose.
Indeed, with respect to the third requirement, the common law principles of contract law require individuals to have the capacity to enter into a contract, and minors are presumed to lack this capacity. Thus, shareholder agreements with minors are prima facie voidable. A court may void the agreement if it finds that:
- the minor was not mature enough to enter into the shareholder agreement;
- the shareholder agreement is not in the minor’s best interests; or
- the other party to the shareholder agreement is attempting to take advantage of the minor.
Furthermore, minors may repudiate shareholder agreements within a reasonable time period in most cases, and while shareholder agreements can be enforceable by a minor, they are not enforceable against a minor.
The best practice, therefore, is to wait until a minor turns 18 before they sign a shareholder agreement. Alternatively, the minor can sign a new shareholder agreement after they turn 18 to avoid the common law assumptions of lack of capacity and voidability issues associated with minors signing contracts. Luckily, there are also other alternatives. To explore these alternatives, and to help determine which option is best for you, please reach out to a member of the Siskinds’ Business Law Group.
For more information on a minor holding shares in an OBCA corporation and insights related to passing shares to a child, read my blog post, Navigating minor’s share ownership in OBCA corporations: Exceptions, risks, and mitigation strategies.
Special thanks to Shereen Arcis, Articling student, who helped write this article.