A well-drafted shareholder agreement cannot always prevent shareholder disputes from arising. Unfortunately, shareholder disputes are an unpleasant reality that many corporations will be required to deal with during their lifetime. For these reasons, business owners and shareholders must understand the remedies that are available to them when dealing with a shareholder dispute.
What is a Shareholder?
Shareholders are individuals who own “shares” in a company’s stock. As such, shareholders are partial owners of the businesses they own shares in and, as shareholders, they have certain rights and responsibilities regarding business decisions.
What is a Shareholder Agreement?
Shareholder agreements are contracts which are entered into by all of the shareholders within a company. A shareholder agreement is intended to provide shareholders with direction on how the business will operate, in addition to outlining the rights obligations of shareholders.
Common Examples of Shareholder Disputes
Shareholder disputes can arise for any number of reasons. However, some of the common causes of shareholder disputes include the following:
- Disagreements regarding business decisions, for example, disagreeing with the results of a vote on how to respond to a business matter;
- Alleged violations of the shareholder agreement, for example, where a shareholder sells their shares in breach of the shareholder agreement;
- Alleged breaches of shareholders’ fiduciary obligations, for example, where a shareholder withholds important information from the other shareholders; and
- Alleged shareholder oppression, for example, where a majority shareholder denies minority shareholders certain rights and obligations.
Common Remedies in Shareholder Disputes
Due to the various types of shareholder disputes, several remedies are available to help resolve disagreements efficiently. The appropriate remedy will depend on the conflict in question, so it is important to contact an experienced business lawyer to discuss your rights and available options.
Both the Ontario Business Corporations Act, RSO 1990, c B.16 and the Canada Business Corporations Act, R.S.C. 1985, c. C-44, outlines various remedies for shareholder disputes. Many of the remedies available in Ontario are similar to those in the Canada Business Corporations Act. This blog will discuss the remedies available under the Ontario’s Business Corporations Act below.
The Oppression Remedy for Minority Shareholders
Minority shareholders can seek “relief from oppression” by bringing a court application. The “relief from oppression” provisions appear in section 248 of Ontario’s Business Corporations Act, however, section 241 of the Canada Business Corporations Act is nearly identical.
If a minority shareholder brings an application to a court, and the court is satisfied that a corporation or its affiliates have acted in a manner that is oppressive or unfairly prejudicial to or unfairly disregards the interests of a security holder, creditor, director, or officer of the corporation, the court can make an order to rectify the matter.
What Orders Will the Court Make for Relief from Oppression?
Ontario’s Business Corporations Act outlines several types of orders that a court can make for relief from oppression, including the following types of orders:
- Directing an issue or exchange of securities,
- Appointing directors in place of the directors currently in office,
- Directing a corporation to purchase securities from a security holder,
- Varying or setting aside a transaction or contract to which the corporation is a party and compensating the corporation or other parties to the transaction or contract,
- Requiring the corporation to produce financial statements,
- Requiring the corporation to compensate an aggrieved party, or
- Winding up the corporation.
The list above is non-exhaustive, and the court has wide latitude to provide remedies when a minority shareholder seeks relief from oppression.
Derivative Actions for Shareholders
Derivative actions are another strategy used to resolve shareholder disputes. To enforce this remedy, a shareholder must bring a “derivative action” on behalf of the company to force another party to follow through with a right or obligation that the company could otherwise enforce, for example, fraud or theft against the corporation.
Derivative actions are often used when the corporation’s management refuses to take action on an issue affecting the corporation. If a shareholder brings an application to the court, the court will make an order if it is satisfied that:
- The corporation’s directors will not bring, prosecute, defend, or discontinue an action;
- The plaintiff is acting in good faith; and
- Bringing, prosecuting, defending, or discontinuing the action is in the corporation’s best interest.
What Orders Will the Court Make for Derivative Actions?
Ontario’s Business Corporations Act outlines several types of orders that a court can make for derivative actions, including the following types of orders:
- Authorizing the complainant to control the conduct of an action,
- Directions regarding the conduct of the action,
- Directing that an amount payable by a defendant in the action will be paid, in whole or in part, directly to the shareholders of the corporation instead of the corporation itself, or
- Requiring the corporation to pay the complainant’s legal fees and costs incurred in the action.
Other Shareholder Remedies in Ontario’s Business Corporations Act
While the oppression remedy and derivative action are two of the most commonly sought-after shareholder dispute remedies, a shareholder can also seek assistance from a court regarding the following:
- An order that a meeting of the corporation’s shareholders be held, including the terms under which the meeting should be held,
- An order declaring the result of a disputed election or appointment,
- An order restricting a director or auditor whose election or appointment is challenged from acting, pending a determination, or
- An order requiring an election or appointment.
Shareholder Agreement Lawyers Advising Clients on Agreements and Representing Them in Disputes
At Campbells LLP, our business lawyers have been helping corporations and business owners with matters related to shareholder agreements since 1999. We are proud of the strong client relationships we have built since then. We ensure that we take the time to understand your business and needs before deciding on the best course of action. Our lawyers will keep you informed throughout the dispute resolution process and are available to help you make the best strategic decisions while considering the future of your business. To speak with one of our experienced lawyers, contact us online or call us at 905-828-2247.