"A Practical Guide for Shareholder Disputes" is an ongoing series, designed for Alberta business owners, directors, and corporate advisors. This series explores key legal concepts and strategic options available when conflicts arise between shareholders in closely held companies.
Read the first article, 'Understanding Oppression Claims', here.
Corporate Governance and How to Proactively Avoid Disputes
Shareholder disputes in private corporations are both common and costly. These disputes often stem from emotional entanglements, conflicting expectations, or inadequate corporate governance frameworks. Resolving disputes of this nature as a shareholder or director can be challenging and often detracts from the operational success of the business. With the appropriate preventative measures, companies can engage in pro-active steps to avoid costly and time-consuming shareholder disputes.
This article offers practical strategies for minimizing the likelihood and financial impact of such disputes through sound governance practices, legal planning, and proactive communication. It also examines what private corporations can do when disputes arise, where a clear, process-oriented response can provide structure to the dispute and effectively minimize the potential harm to the company's success and existing shareholder relationships.
I. Common Sources of Shareholder Disputes
Disputes most frequently come to pass where there is ambiguity or a difference in interpretation related to shareholder rights and responsibilities, or exit and sale procedures. One major source of conflict is share transfer restrictions. When it is unclear who can purchase or inherit shares, or under what conditions, disputes often emerge during divorce, death, or shareholder buyouts. Similarly, control struggles tend to surface when governance structures are unclear or when there is a concentration of decision-making authority among a small group of shareholders who may also serve as directors, as is often the case with small, privately owned and operated companies.
Transitional disputes are also common, especially in the absence of mechanisms that allow shareholders to leave the company and receive fair compensation for their shares. Without a pre-agreed valuation method, shareholders may feel they are unable to not be able to receive fair or reasonable compensation for their share holdings. Succession planning failures, particularly in family businesses, often result in tension between generations or among siblings who have different visions for the company. Lastly, conflicts of interest and the intermingling of personal and business assets by directors or officers can quickly erode trust, especially if corporate opportunities are diverted or personal benefits are obtained at the company's expense.
II. Tools for Preventing Disputes
a. A Tailored Governance Structure
A critical first step in preventing shareholder conflict is adopting a clear and formal governance structure that is tailored to the private corporation. Unlike public corporations, private corporations often operate with informal oversight and few independent directors. In these settings, there is no one-size-fits-all governance model. Decision-making authority can be concentrated, and a specific individual may assert their authority inappropriately. This structure, while efficient in close-knit companies, can leave the business operations vulnerable during times of disagreement.
In private corporations, governance is often far less formalized than in public corporations. The board of directors may be composed entirely of shareholders or family members, who may conflate their personal interests with their fiduciary responsibilities. Decision making is frequently constrained by the terms of a USA, and directors may face divided loyalties when they also hold significant ownership stakes. Moreover, directors in closely held corporations do not typically owe duties directly to shareholders unless specified in the agreement, and statutory rights can often be waived. This creates a unique dynamic in which directors and officers are more accessible to shareholders than in public companies, and many shareholders are also involved in management.
These blurred lines increase the likelihood of disputes over control, the sale of assets, or the direction or corporate opportunities. For example, in Venini v Venini, four siblings, all equal shareholders to a family business, litigated over one of the siblings' continued employment with the company, as well as his compensation and voting rights as a director.1 Similarly, Fuentes v. Camino Construction Inc. saw a husband and wife's company embroiled in litigation when the marriage faltered and the husband began diverting opportunities to a separate company under his sole control. 2
To address and prevent these types of challenges, closely-held private corporations should:
- Clarify the specific roles and responsibilities of its shareholders, directors, and officers;
- Implement structured decision-making processes; and
- Not rely on any informal arrangements or oral understandings.
b. Unanimous Shareholder Agreement (USA)
Even where the underlying personal relationships are strong, clear and formalized governance structures provide a roadmap for navigating future disagreements.
A USA is a powerful, process-oriented tool for mitigating and managing shareholder disputes. It allows shareholders to circumvent the default statutory rules and define their own procedures for decision making, share transfers, valuations, and exits. The USA can also address shareholder voting rights, which may not always be proportionate to ownership. In Husack v. Husack, the Court upheld the waiver of statutory dissent rights because the USA included clear language demonstrating the parties' intent.3 This underscores the importance of precise drafting.
c. Independent Advice
Another tool for mitigating disputes mitigation tactic is encouraging shareholders to seek independent legal and financial advice before entering into significant transactions or agreements. This is especially important when there is an imbalance of power or knowledge among shareholders. Independent advice can mitigate claims of undue influence or oppression and establish a record that the parties entered agreements freely and with full knowledge of their implications.4
d. Planning for Exit, Succession and Change
Exit and succession planning are critical components of sound governance. Private corporations should clearly define the events that require or allow a shareholder to exit or be bought out. These may include death, disability, insolvency, termination, or breach of agreement. Exit mechanisms such as shotgun clauses, rights of first refusal, and put or call options provide structure and reduce the need for protracted negotiation during emotionally charged moments.
Valuation of shares is often the most contentious aspect of any shareholder exit. Predetermined valuation strategies can provide certainty, but they also risk becoming outdated or inequitable over time as a company grows. A more flexible approach may involve appointing a third-party financial expert and providing clear parameters as to how fair market value is to be calculated.
In Fakih v. AHM Investments Corp., the Court intervened to break a 50-50 voting deadlock, appoint a third director, and order financial oversight.5 Rather than forcing an exit, the Court sought to stabilize the business, especially because there was no clear shareholder agreement providing an exit mechanism. This case highlights the importance of clearly defined governance structures and exit mechanisms in avoiding costly shareholder conflict.
III. Tips for When Disputes Arise
a. Maintain Corporate Neutrality
When disputes arise, the corporation itself must remain neutral. Using company funds or resources to support one group of shareholders over another can give rise to oppression claims and undermine confidence in the governance structure. In Lizotte v. Arsenault, the Court held that reimbursing legal fees for only one group of shareholders violated the reasonable expectation of neutrality.6 Further in Discovery Enterprises Inc. v. Ebco Industries Ltd., the Court acknowledged that the corporation had not remained neutral due to personal conflicts between shareholders, who also serve as directors.7
Neutrality must be maintained during proxy battles or board elections. The corporation's role is to ensure the integrity of the process, not to influence the outcome. Corporate counsel must be cautious about representing both the corporation and individual shareholders in contentious matters, as doing so may create conflicts of interest that breach professional obligations. In any case where corporate counsel has acted for the corporation at large, said counsel should not operate for individual shareholders during a dispute.
b. Engage Confidential Dispute Resolution
Litigation is costly and public. Closely held private corporations often benefit from shareholder disputes in open court can be damaging to both business operations and the reputations of the individuals involved.
Confidential mechanisms such as arbitration and mediation are valuable alternatives. Arbitration offers privacy, speed, and procedural flexibility, especially when the arbitrator has expertise in corporate governance or valuation. These mechanisms can be tailored in the USA to reflect the needs of the business and preserve relationships while ensuring accountability.
When disputes involve valuation, it is essential that the arbitration clause provide guidance on how the valuation is to be conducted. This includes defining the valuation date, selecting the appropriate method, and specifying whether the minority discounts or premiums apply. Evaluators must be independent, and their scope should be agreed upon by all parties in advance to avoid further disputes.
IV. Family Enterprises and Unique Governance Challenges
Family businesses account for a significant portion of Canada's private sector GDP and also face unique governance challenges.8 These closely-held corporations frequently lack formal succession planning, and their decision-making processes are often influenced as much by family dynamics as they are by business needs. According toFamily Enterprise Canada, roughly 60% of family enterprises are expected to change ownership within the next ten years, but a majority do not have adequate plans in place for this transition.9
V. Conclusion
Shareholder disputes can be deeply disruptive, but they are rarely inevitable. With foresight, careful planning, and ongoing communication, private and family-run businesses can avoid many common pitfalls. Key strategies include adopting a regularly updated shareholders' agreement, maintaining clear and fair valuation and exit mechanisms, and ensuring corporate neutrality in times of conflict. Confidential dispute resolution processes should be incorporated from the outset, and directors must remain vigilant in separating their personal interests from their fiduciary duties. Governance requires a framework that helps companies navigate complex shareholder disputes with fairness, foresight, and integrity.
At Brownlee, we believe the best dispute is the one that never happens. Our Commercial Litigation and Business Service teams work closely with business owners and investors to put strong governance structures in place, draft clear shareholder agreements, and set out fair, transparent processes for decision-making. By anticipating potential flashpoints—from profit distribution to exit strategies—we help you avoid costly, distracting conflicts that can damage both relationships and the bottom line. Whether you're launching a new venture or refining your existing corporate structure, we'll give you the tools and advice you need to keep your shareholders aligned and your business thriving.
Footnotes
1 Venini v Venini, 2023 ABKB 524
2 Fuentes v. Camino Construction Inc., 2021 ONSC 2967
3 Husack v. Husack, 2024 ONCA 117
4 Fuentes v. Camino Construction Inc., 2021 ONSC 2967
5 Fakih v. AHM Investments Corp., 2022 ONSC 7001
6 Lizotte v. Arsenault, 2012 NBCA 89
7 Discovery Enterprises Inc. v. Ebco Industries Ltd., 2002 BCSC 1236
8 Family Enterprise Canada, 'Statistics on Canadian Family Enterprise' (2022).
9 Ibid.
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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.
