Shareholder Disputes

The starting point for determining your rights as a shareholder is to consult the Shareholder Agreement. However, generally speaking, as a shareholder you have three key rights that help you have a say in the company’s operations. These include:

• The right to vote at shareholders’ meetings
• The right to attend shareholders’ meetings
• The right to access accurate and complete information on the corporation’s affairs

The right to access the corporation’s affairs means having access to key documents including articles of incorporation, amendments, by-laws, minute books, financial statements (audited or draft), and other key documents that show the financial health of the business.

Directors and officers have a serious responsibility when it comes to running a corporation. They have a duty of good conduct, known as a fiduciary duty, which requires them to act in the best interests of the corporation. They need to make decisions putting the corporation first and have to act with integrity in a way that reflects the corporation. 

When this fiduciary duty is breached, it means that directors and officers are making decisions that put their own interests first as opposed to those of the company. This can include getting unfair benefits from their position, making decisions that put the corporation in jeopardy, or doing something to harm the corporation’s reputation or share value.

When a director or officer breaches their fiduciary duty, shareholders may have a legal remedy as the owners of the corporation. This often comes in the form of an ‘oppression remedy’.

An oppression remedy is a remedy available to shareholders (as well as other potential stakeholders in a company including creditors) under the Ontario Business Corporations Act (“OBCA”) or under the Canada Business Corporations Act (“CBCA”) for shareholders who feel as though they have been wronged by those who govern the actions of the corporation. 

Oppression remedies usually occur in three instances:

1. When the corporation or its officers commits a serious wrong, such as abusing power or participating in coercion;
2. When minority shareholders are treated with unfair prejudice, such as being mistreated or being forced out of the company; or,
3. When a corporation’s actions have shown unfair disregard to shareholders’ rights.

These can include things such as excluding shareholders from meetings, failing to provide them with necessary information, paying dividends in a manner that hurts the shareholders, or even dissolving a corporation in order to avoid obligations to shareholders. 

Oppression remedies can also be used when directors or officers are behaving in ways that unfairly disadvantage shareholders. If they are using the corporation for their personal benefit, for example, or wrongfully taking funds out of the corporation, that will dilute funds owed to shareholders. Some directors and officers may also be guilty of diverting business opportunities to another company that they have a greater financial interest in.

A court has various powers when providing an oppression remedy including ordering compensation, an investigation under the OBCA, making orders against the specific directors or officers guilty of the oppressive conduct, appointing new directors in place, restraining the offending conduct, ordering that a party’s shares be bought out or sold, or even ordering that the corporation be liquidated and dissolved wound up.

While some shareholder disputes may require a trial or a hearing, there are other efficient, potentially less-expensive ways to seek a resolution. These include: 

Negotiation 

Negotiation is usually the first step taken by a lawyer. The goal is to start a dialogue with the opposing party in an attempt to resolve differences and come to an agreement. While negotiation can offer an excellent alternative to litigation, in some cases, negotiation is simply not practical nor feasible. In those cases, judicial intervention will likely be required.  

Mediation

Mediation involves bringing in a third-party neutral mediator who can help bridge the gap between all sides. A mediator is a trained professional, usually a lawyer themselves, who is knowledgeable about the subject matter and can quickly understand the issues. While a mediator cannot force parties to settle, they will often work hard to find common ground and encourage settlement before any trial. Mediators often add value by providing their honest opinion as to each side’s strengths and weaknesses in order to make it known that neither side has a perfect case and should therefore consider settlement. 

Arbitration

Arbitration is an alternative dispute resolution mechanism which can offer a faster resolution than a trial. Arbitration can be viewed as “private” court. An arbitrator is a person who acts as a decision maker. An arbitration is more relaxed than a courtroom and there are less technical rules – however, their decisions are binding and, in some cases, may even be without recourse to appeal. After weighing all of the evidence, an arbitrator makes a formal decision that is binding on the parties. An arbitration can also cost much less than a trial. In addition, an arbitration also allows parties to choose their arbitrator and to keep any disputes out of public court records. The added benefit of arbitrators is that they often have extensive experience in the specific area of law and may be mutually selected by the parties.