A vendor who kept giving instructions to staff

The situation

A private equity fund with a logistics thesis acquired 100% of the shares of an Ontario trucking and warehousing business from its founder for a purchase price in the low eight figures. The founder agreed to a 90-day transition period, documented in a two-page consulting letter attached to the share purchase agreement, to introduce the new owner to customers and carriers.

The share purchase agreement itself was standard: representations, an indemnity, a modest holdback. Diligence covered financials, contracts, employment and litigation. Corporate records diligence confirmed the target was validly incorporated, in good standing, and that its minute book was complete back to 2013.

The problem

What the minute book review did not flag was the substance of a document sitting in it: a unanimous shareholder agreement (a “USA”) signed in 2013, when the founder had brought in a since-bought-out minority partner. That USA restricted the board’s powers and vested day-to-day management authority in the founder personally, in the manner the CBCA expressly permits: a unanimous shareholder agreement restricting the powers of the directors “is valid” under CBCA s.146(1), and a person given management powers under one acquires, under s.146(5), “all the rights, powers, duties and liabilities of a director of the corporation” — while the corporation’s actual directors are relieved of those duties to the same extent.

Nobody had terminated it. The 2013 minority buyout had dealt with share ownership, not the governance document layered on top of it. By the time the fund closed, the founder was, on paper, still the person the CBCA treated as having a director’s management authority over the business — not because of the new consulting letter, but because of a decade-old agreement nobody in the room remembered existed.

CBCA s.146(3) makes this automatic on a share sale: “A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed to be a party to the agreement.” The fund’s acquisition vehicle became bound by the USA’s governance terms the instant it took the shares, whether or not it knew the USA existed.

The rule that decided it

The CBCA does give a purchaser an exit, but it is conditional as well as time-limited, and the condition is the half that is usually missed. Section 146(4) opens: “If notice is not given to a purchaser or transferee of the existence of a unanimous shareholder agreement, in the manner referred to in subsection 49(8) or otherwise” — and only then may the purchaser, “no later than 30 days after they become aware of the existence of” the agreement, rescind the transaction by which it acquired the shares. Both halves mattered here. The clock runs from awareness rather than from closing, so it started only when the fund’s counsel actually read the 2013 USA during the week-six dispute. But the words “or otherwise” cut the other way: a USA sitting in a minute book that the seller produced, and that the buyer’s own diligence signed off as complete, is a strong candidate for notice having been given — in which case the s.146(4) right never arose at all. Counsel treated rescission as probably unavailable rather than merely impractical, and in any event unwinding a $14 million closed acquisition was never a realistic remedy for a fund whose thesis depended on keeping the business.

Rescission was academic anyway: nobody wanted to unwind the deal. What mattered was that the founder’s continued instructions to staff were not a personality problem or a boundary problem in the ordinary sense — they were, until the USA was dealt with, arguably an exercise of a management power the founder still legally held under a document the SPA had never terminated.

The fix

Counsel negotiated a short amending and termination agreement: the founder, the fund’s acquisition vehicle, and the corporation all signed a release and termination of the 2013 USA, restoring the directors’ ordinary powers under CBCA s.102 and making the new board (which the fund had appointed at closing under the removal-and-appointment mechanics in CBCA s.109) unambiguously the source of management authority. The founder’s remaining transition role was rewritten as a narrow, dated consulting scope — introductions, answering questions, no operational instructions to staff — on the model treadstonelaw’s own drafting guidance for transition-services covenants: “define the scope of services narrowly enough that both sides know what is expected, and what is not”.

The termination agreement cost a week of negotiation and a modest legal bill against a $14 million deal. Discovering the USA during diligence, before signing, would have cost nothing at all — a purchase price adjustment or a pre-closing termination condition, instead of a post-closing scramble against a running 30-day clock.

Takeaways

• • A share purchase makes the buyer a deemed party to any pre-existing unanimous shareholder agreement (CBCA s.146(3)) — whether or not diligence found it.
• • The s.146(4) rescission right exists only where notice of the USA was not given — and a USA produced in the data room may itself be that notice. Where it does arise it runs 30 days from actual awareness, not from closing, and it is a real remedy only while unwinding the deal is still practical.
• • Corporate-records diligence has to read what a USA actually says, not just confirm one exists in the minute book. A USA silently overrides the ordinary board-management default.
• • Write the transition role narrowly and in writing before closing, and terminate any conflicting governance document as a condition of closing — not as a post-closing repair.

Sources

• • Canada Business Corporations Act, s.146 — marginal note Unanimous shareholder agreement. s.146(1) a USA restricting the directors’ powers “is valid”; s.146(3) Constructive party — a purchaser of shares subject to a USA “is deemed to be a party to the agreement”; s.146(4) When no notice given — the 30-day rescission right, conditional on notice not having been given; s.146(5) Rights of shareholder — parties given the management power hold “all the rights, powers, duties and liabilities of a director.”
• • Canada Business Corporations Act, s.102 — marginal note Duty to manage or supervise management. The default the USA displaced, and the default its termination restored: “Subject to any unanimous shareholder agreement, the directors shall manage, or supervise the management of, the business and affairs of a corporation.”
• • Canada Business Corporations Act, s.109 — marginal note Removal of directors — the ordinary-resolution mechanic the fund used at closing to appoint its own board.
• • Treadstone Law — post-closing covenants, non-compete and transition services — source of the drafting rule quoted above (“Define the scope of services narrowly enough that both sides know what is expected, and what is not”). It covers transition-services agreements only; it does not discuss unanimous shareholder agreements.
• • Treadstone Law — unanimous shareholder agreements under the OBCA — confirms that “a transferee of shares takes those shares subject to the USA, whether or not they read it.” Written for the Ontario Business Corporations Act, not the CBCA, and it does not address the s.146(4) rescission right — adjacent, not on point for the federal provision that decided this file.