Canada: Top Six Mistakes Made In Corporate Divorces

Last Updated: September 11 2018
Article by Caroline J. Smith and Joe Gill

Winding up a corporation can be as acrimonious as ending a marriage, and may be even more complicated and expensive. But it does not have to be—if you avoid these common mistakes.

6. Ignoring claims against the corporation

The end of the corporation does not mean the end of the claims against it. A corporation can still be sued after it is dissolved. A corporation's creditors can still seize the corporation's assets to satisfy their judgments, even after they have been distributed to shareholders. If there any outstanding or potential lawsuits against the corporation, you may wish to delay the dissolution of the corporation until they can be resolved, or to make arrangements to satisfy judgments issued against the dissolved corporation.

You should be especially wary of debts owing to the Canada Revenue Agency (CRA) for items like unpaid income tax, unremitted goods and services tax, and unremitted payroll amounts. The CRA has broad powers to collect what they are owed and they can go after the corporation, its directors, and anyone who received funds from the corporation when it owed money to the CRA.

5. Forgetting about the unanimous shareholder agreement

Unanimous shareholder agreements (USAs) usually include a specific procedure for the wind-up of the corporation. USAs also often contain general provisions that affect aspects of the wind-up process, including the calling of meetings, directors' powers, and votes by shareholders.

Critically, a USA will almost always include buy-sell provisions that could reduce the potential for a prolonged (and expensive) corporate divorce process. The most common of these provisions is a "shotgun clause", which allows one shareholder (Shareholder A) to purchase the shares of another shareholder (Shareholder B) at any time. Once Shareholder A "fires the shotgun" by making an offer to purchase Shareholder B's shares, Shareholder B must either sell her shares to Shareholder A, or buy out Shareholder A's shares at the price Shareholder A offered to Shareholder B.

4. Disregarding the rights of minority shareholders

A minority shareholder who believes that their rights or interests have been disregarded can file a lawsuit against a corporation, its directors, and sometimes its other shareholders on the basis that the minority shareholder has been "oppressed". This is the "oppression remedy". The court has a broad range of powers to address oppression, including the power to force the corporation or another person to purchase the minority shareholder's shares, and the power to set aside a transaction.

3. Skipping the independent legal advice

The interests of the corporation, its directors, and its shareholders may diverge on certain issues. Every director and shareholder should consult their own lawyer to ensure that their personal interests are protected.

Directors especially should be aware that many laws allow for direct action against them personally; however, many of these same laws provide a defence if the director acted in a reasonably diligent way. Seeking the right advice will help a director set up this defence.

2. Failing to consult the appropriate specialists

If it appears that the corporation may be insolvent (i.e. unable to pay its debts), seek advice from a lawyer with expertise in insolvency law. Directors and shareholders of insolvent corporations can be exposed to significant liability.

Depending on the corporation's financial circumstances, it may be worthwhile to consult a tax lawyer to ensure that the corporation is wound up in a tax-efficient manner. Simply dividing up the corporation's assets can lead to large tax bills for the shareholders. Far better to pay a relatively small amount to a tax lawyer than a much larger amount to the CRA.

1. Lack of financial disclosure

Proper financial disclosure allows directors and shareholders to ensure that the corporation's debts are paid and its assets are dealt with appropriately. Inadequate financial disclosure often leads to misunderstandings and disputes. A good starting place is to ensure that the corporation has met its financial disclosure obligations under the applicable law—for example, under Saskatchewan's Business Corporations Act, the directors of a corporation must provide its shareholders with annual comparative financial statements (which may have to be audited).

CONCLUSION

There are a number of pitfalls you can succumb to when staring down a corporate divorce. While the situation is never a positive one, we at McKercher do our best to help our clients through this difficult process. We have deep expertise in insolvency, tax, commercial litigation, and corporate law matters. We leverage this expertise to offer skillful and cost-effective solutions to manage your risk and help you move forward from a difficult situation. Please reach out to us if you'd like to discuss your specific situation.

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.

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Authors
Caroline J. Smith
Joe Gill
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