A shareholders’ agreement for a professional corporation is not a normal shareholders’ agreement

A professional corporation shareholders’ agreement has to be drafted against two constraints an ordinary corporation never faces: the pool of lawful shareholders is closed, and the corporation’s right to exist — its certificate of authorization — depends on your share register staying compliant.

The clause that can void the whole agreement

Start with the worst case. Section 3.2(5) of the Business Corporations Act says that, subject to subsection (6), a unanimous shareholder agreement in respect of a professional corporation is void unless each shareholder is a member. Not the offending clause — the agreement. A USA is the instrument lawyers reach for when shareholders want to pull management decisions up from the directors to themselves, and in a professional corporation it can simply be void.

For most professions the subsection rarely bites, because every shareholder must be a member anyway. A law professional corporation or a CPA corporation that satisfies the share-ownership rules satisfies section 3.2(5) automatically.

The interesting case is the physician or dentist corporation with family shareholders — the one structure where non-members lawfully hold shares. Read the bare statute and the conclusion looks inescapable: a non-voting spouse is a shareholder, the spouse is not a member, so the USA is void. That is what the published commentary says, where it says anything at all. Our own article on who can own shares in a professional corporation said it too, and noted that no exemption appears in Regulation 39/02 to cure it.

The cure exists. It is just in the other regulation. O. Reg. 665/05 — made under the Business Corporations Act, the same regulation that creates the family-share regime — exempts physician corporations (s. 2(4)) and dentist corporations (s. 3(4)) from section 3.2(5) and substitutes a modified rule: the USA is valid provided each voting shareholder is a College member and each non-voting shareholder is a member, a family member of a voting shareholder, or a trustee of the permitted trust for minor children. In other words, the same people who may lawfully hold the shares may lawfully sign the USA. The regulation even rewires section 108(5) of the Act so that where a USA strips the directors of powers, it is the member shareholders — not the spouse holding non-voting shares — who take on the directors’ duties and liabilities.

So the trap is real, but it is not where you were told it is. A USA for a family-shareholder medicine or dentistry corporation is not void for having family shareholders; it is void if the family shareholders fall outside the permitted classes — an adult child’s spouse, a sibling, a parent-in-law, a corporate trustee. And for every profession outside medicine and dentistry, the bare statute governs and there is no rescue, because the regulation-making power in section 3.2(6) extends only to health profession corporations.

Who can actually buy your shares

Now the clauses that are valid and still do not work. A shotgun clause assumes either side can end up owning the company. A drag-along assumes a third-party buyer for everyone’s shares. A right of first refusal assumes an outside offer to refuse. All three assume an open market, and the market here is closed: every lawful holder of a voting share is a member of the same College.

Between two physician shareholders, a shotgun can still fire. Point it anywhere else and it jams — a spouse holding non-voting shares cannot counter-buy voting shares, and an outside investor cannot buy in at all. A drag-along is worth drafting only for the buyer who can lawfully complete: another member, or a corporation that will itself qualify for a certificate of authorization. What replaces the open-market mechanics is valuation and funding — a fixed valuation formula or appraisal mechanism, insurance where the trigger is death or disability, and payment terms the remaining shareholders can actually meet, because you cannot count on an auction to set the price.

Death: the estate holds shares it cannot vote

The Act anticipated the funeral. Section 3.3(1) says the certificate of authorization remains valid despite the death of a shareholder — the corporation does not cease to be a professional corporation because a member died. What the Act does not do is make the estate a member. The voting shares sit with an estate trustee who cannot lawfully be their long-term owner, and the usual bridge in an ordinary shareholders’ agreement — the estate votes the shares pending the buyout — is void here, because an agreement or proxy vesting voting rights in a non-member is itself void under section 3.2(4) and its regulation-substituted equivalent.

So the death clause has to do the work the estate cannot: an automatic trigger on death, a price the documents can compute without anyone negotiating, life insurance sized to fund it, and a closing measured in weeks. The College is watching the clock too — CPSO requires notice of a shareholder change within 15 days, with a director’s declaration of continued compliance under O. Reg. 39/02 s. 4.1, and failing to give it is an independent ground for revoking the certificate.

Divorce is in the statute

Section 3.3(1)(b) keeps the certificate valid despite “the divorce of a shareholder.” Parliament listed it right after death, which tells you how often the drafters expected it to come up. The protection is narrow: the certificate survives the event, but an ex-spouse is no longer a “family member” — the definition runs to a current spouse, child or parent — and a share register with an ineligible holder on it is a revocation ground under O. Reg. 39/02 s. 6. Once the College gives notice, the regulation requires revocation 60 days later if the ground still exists.

The agreement — or the share conditions — should convert the event into a transaction automatically: on ceasing to be a family member, the non-voting shares are redeemed or repurchased at a pre-agreed price, without waiting for the family law file to resolve. Sixty days is a short window in litigation time.

Losing the licence

Suspension and revocation run on different tracks. A suspension of the corporation’s certificate does not end its status as a professional corporation — section 3.3(1)(d) says so. Revocation does, and the grounds in O. Reg. 39/02 s. 6 include the corporation ceasing to be eligible and the sole voting shareholder ceasing to practise. A member who loses their licence takes the corporation’s eligibility down with them, on the same 60-day clock after notice.

A normal shareholders’ agreement treats a shareholder’s professional standing as none of its business. This one cannot. It needs a defined licence event — revocation, resignation, a suspension longer than a stated period — as a compulsory transfer trigger, priced in advance, with a closing deadline shorter than the College’s 60 days.

The group practice question

Two physicians, one corporation, equal voting shares. It is lawful, and it is usually the wrong structure. Three reasons.

First, the liability provision nobody reads. Section 3.4(4) of the Act makes a person jointly and severally liable with the corporation for all professional liability claims against it arising from errors that occurred while the person was a shareholder. In a shared corporation, that invites the argument that each member stands behind claims generated by the other’s practice. Subsection 3.4(5) caps a member’s liability at what it would have been outside the corporation, and how those two subsections interact in a group practice has not been worked out by the courts — which is precisely the problem. Separate corporations never raise the question. The family shareholders, for what it is worth, are exempt: O. Reg. 665/05 s. 2(5) lifts the deemed-acts and joint-liability provisions off non-member non-voting shareholders.

Second, the compliance blast radius. In a shared corporation, one member’s unreported shareholder change, missed renewal or licence problem is a revocation ground for the corporation both of you practise through.

Third, exits. Unwinding a shared corporation means share transfers, College notices and declarations, and a negotiation conducted inside a closed market. Unwinding a cost-sharing arrangement means ending a contract.

The structure that works for most group practices: each professional holds their own corporation, and a cost-sharing agreement between the corporations does the work a shareholders’ agreement would otherwise do — premises, staff, equipment, expense allocation, departure terms, non-solicitation of staff and, where the profession’s rules allow, patient-record arrangements. You get the governance without the shared register. Where professionals genuinely co-own one corporation — a long-standing partnership incorporating, a practice purchase structured that way — the shareholders’ agreement earns its complexity, and it should be drafted by someone who has read the regulation, not just the Act.

The Business Corporations Act wrote the divorce clause for you. The redemption clause is still yours to write.