What can you do if you are a shareholder of a private company in Canada and you are at odds with the other shareholders? What if you suspect co-shareholders are stealing from the company? Or maybe, you are a minority shareholder and feel like the majority is taking unfair advantage of you?
Disputes between shareholders of private companies are often emotional and, in Ontario, can be as complicated as a personal divorce. Further, the disruption to a small business is often devastating. Knowing what remedies are available to resolve matters quickly are often the key to survival.
A shareholder has the right to a proportionate vote in the affairs of the company and to access sufficient information about the company's affairs and financial position. Other rights may be supported through a shareholders' agreement. Although a majority shareholder may have the right to effectively control and "run" the business, a minority shareholder cannot be "oppressed". In other words, they must be treated fairly.
A shareholders' agreement can go a long way to ensuring disputes are avoided or at least, provide the mechanism that allows them to be settled quickly. An agreement identifies shareholders' specific responsibilities and outlines how and where disputes are to be resolved. For example, it can specify forced buy/sell considerations during a dispute and even include a formula or other means to determine the transaction price.
Briefly, a shareholders' agreement should include at least the following:
- Approval/decision process for major corporate decisions;
- A buy/sell provision – perhaps, a shotgun clause to
force a transaction and a detailed dispute resolution
- Description of the process to allow for the fair valuation of
the company's shares;
- Stipulation of management responsibilities, non-competition
restrictions, bonus and remuneration formulae;
- Mechanisms to deal with shareholder deaths, misconduct,
divorce, incapacity, etc.; and
- Succession arrangements- insurance of key persons.
If the shareholders' agreement doesn't help to resolve the above matter quickly, the dispute may need to be resolved by means of a more structured Mediation or Arbitration, or alternatively, by the Courts.
If a minority shareholder feels they are being treated unfairly, an "oppression remedy" is a strong tool employed by the Court to compensate the minority. The Court can impose:
- A specific arbitrary decision of a matter in dispute, including
allowing a minority shareholder to sue a majority shareholder on
behalf of the company in the case of a theft or breach of fiduciary
- A forced purchase of shares between the disputing parties;
- A winding up of the company and distribution of the net
Where a minority shareholder is oppressed and the Court deems that a fair or practical remedy is to have the majority buy the minority shares, it is often done at a "fair value" which may be fair market value without deduction for a minority discount.
Establishing a team of advisors
Involving an Investigative and Forensic Accountant ("IFA") can assist in establishing if some form of oppression is involved. An IFA can also investigate the quantum of any losses suffered by the company or by the oppressed shareholder who would need to be restored or otherwise considered in an equitable resolution.
A Chartered Business Valuator (CBV) can assist in establishing the fair and equitable value for any transaction-based remedy, including the purchase of the minority shareholding. In an advisory role, the CBV can determine the price impact of various sale structures and terms and ensure that adequate consideration is being paid to tax consequences.
All of the various transactions will often trigger some form of tax which will depend on the structure and terms of the proposed resolution. For example, a buy-back of shares by the company may trigger a dividend for tax purposes. A purchase of shares between shareholders will trigger a capital gain. Therefore, the services of a tax specialist are often needed.
The sooner an agreement is made, the more likely a private business is to survive a shareholder dispute. A comprehensive shareholders' agreement can help to preserve operations and resolve matters quickly. Qualified and experienced legal advisors, and forensic, valuation and taxation experts hired early in the process could keep the process out of a prolonged, expensive and destructive litigation by providing the facts, insight and information to allow all parties to make informed decisions as quickly as needed.
Jim Muccilli is a Partner with the Business Valuation & Litigation Support Group at Soberman LLP. Jim has worked in this field for over 20 years and brings with him a vast knowledge in the areas of business valuation, loss quantification and forensic investigations. He is also a qualified expert witness.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.