In small companies, shareholder disputes often arise between relatives or friends who went into business together, and the history of that relationship usually bears on the dispute as much as the corporate documents do. When two people who built a business together stop agreeing, and one controls the bank account while the other holds a minority of the shares, the Business Corporations Act governs what follows, and its oppression remedy can give a minority shareholder more protection than is commonly supposed.
The oppression remedy
Alberta’s Business Corporations Act allows a shareholder, and in some cases a director, officer or creditor, to apply to the Court where the corporation’s affairs have been conducted in a manner that is oppressive, unfairly prejudicial to them or that unfairly disregards their interests. The test looks at the reasonable expectations of the parties, which in a closely held company are usually set by how the business was actually run rather than by what the articles say.
The conduct that succeeds tends to be recognizable: dividends withheld while the controlling shareholder draws a large salary, related party contracts that move value out of the company, a minority shareholder removed as director and cut off from information, or shares issued to dilute someone who would not sell. The remedies are wide, and the Court can order a buyout at a fair value, restrain conduct, set aside transactions, appoint a receiver or, in the last resort, wind the company up.
Deadlock and the fifty-fifty company
Two equal shareholders who cannot agree have a problem the statute does not fully solve, because neither is oppressing the other and the company simply cannot make a decision. A shareholder agreement with a shotgun clause or another exit mechanism is the answer written in advance; without one, the choices narrow to a negotiated buyout, a court-supervised sale or winding up, all of which are worse than the agreement would have been.
Other routes
Where the wrong is done to the corporation rather than to a shareholder personally, such as a director diverting a corporate opportunity, the remedy is a derivative action brought in the corporation’s name with the leave of the Court. Shareholders also have statutory rights to records and financial statements that are enforceable on their own, and a unanimous shareholder agreement, where one exists, is a contract that can be enforced like any other. Partnerships without a corporation are governed by the Partnership Act and the partnership agreement, and the same issues of accounting, expulsion and dissolution arise.
What to do first
The first step is to preserve the record, since emails, board minutes, financial statements and bank records are what these cases run on, and a shareholder who has been cut off from information should make a written demand for it before anything else. Then get advice on whether the conduct is oppressive in the legal sense or merely disappointing, because the two are not the same and the second is not actionable. A limitation period of two years applies from when the claim was discovered, and it runs while people are hoping the other side will come around.
Preventing the dispute
Almost every shareholder dispute the firm sees would have been a short conversation if the parties had signed a shareholder agreement at the start. Buy-sell terms, valuation, what happens on death, disability or resignation, dividend policy, who can bind the company, and how a deadlock is broken are all decisions that are cheap to make when everyone is getting along and ruinous to litigate afterwards.
Where the firm can act
Shareholder agreements, partnership agreements, negotiated buyouts and advice are available to businesses anywhere in Alberta. Contested matters proceed at the Calgary Courts Centre, where counsel appears in person, and advisory and uncontested work is available anywhere in Alberta. The practice is virtual, so meetings take place by video, telephone and email, with in-person meetings available on request in Cochrane or in Calgary.
If you are being squeezed out, cannot get information from your own company, or need an agreement before the problem arises, call (587) 328-3328.
Frequently Asked Questions
Yes. The oppression remedy protects minority shareholders against conduct that is oppressive, unfairly prejudicial or unfairly disregards their interests, and the Court can order a buyout at fair value among other remedies.
If your shareholder agreement has an exit mechanism, it governs. If not, the realistic options are a negotiated buyout, a court-supervised sale or winding up the company.
Directors can be removed by shareholder resolution, but removing a minority shareholder from the board and cutting them off from information is a common ingredient in a successful oppression claim.
Generally, two years from when you knew or ought to have known of the conduct. The limitation period continues to run while the parties wait to see whether matters improve.
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