The Corporate Divorce

  • January 31, 2023
  • Jessica Byles-Nolet, lawyer at Sicotte Guilbault Legal Services

Picture this: You have a great idea for a business or you join an up-and-coming business or even an established business, and, at the start everything seems great with the other shareholders of the Corporation. You believe that your business will be everything you imagined, and you have invested your time, energy, and/or money into this business hoping that it will take off and grow into a huge success. However, after years of work, you realize that you and your business partners do not see eye to eye any longer and you now want out of the business. You think to yourself “what do I do?”

Unfortunately, this is a common situation for many Shareholders in closely held corporations, even family-owned businesses.

In order to set expectations from the start and minimize legal disputes, all Shareholders in closely held corporations should consider signing a Unanimous Shareholder Agreement before the business commences. The shareholders agreement will outline the resolution mechanisms should they not get along in the future. A Unanimous Shareholder Agreement is essentially the equivalent of a prenuptial agreement for a corporation. The Unanimous Shareholders Agreement should outline the mechanism of valuation for the business and set out how the parties can exit the Corporation in the future. It is prudent that a Corporate Lawyer assists with drafting the Unanimous Shareholder Agreement early in the formation of the business, particularly to avoid any disputes regarding the value of the shares.

That being said, hindsight is 20/20. It is not uncommon for Shareholders without a Unanimous Shareholder Agreement to want out of the business, and the other shareholders not allowing them to exit the Corporation at a fair price. If a Shareholder is unable to resolve their dispute with the other shareholders, then they will have to consider litigation to resolve the issue. In order to get out of the business with the assistance of the court, a Shareholder will have to consider whether the following types of claims are available to them:

  1. Oppression Remedy

The Oppression Remedy is a remedy available under section 248 the Ontario Business Corporations Act (“OBCA”) and section 241 of the Canada Business Corporations Act (“CBCA”). This remedy allows minority shareholders to bring an action when they believe that they been wronged by a corporation. The Oppression Remedy is quite flexible and allows a wide variety of remedies that a judge could order, such as a forced buy-out or compensating an oppressed shareholder.

Specifically, the Oppression Remedy allows a Plaintiff to bring a claim against Corporation and/or the Directors and/or Officers of the Corporation. However, it is important to note that this is a personal remedy available to the shareholder who brought the action. It does not allow the court to award remedies to other shareholders not included in the action.  

In order to establish that the shareholder has been oppressed, the Supreme Court of Canada has established a two part-test: (1) the Plaintiff must establish a breach of a reasonable expectation; and (2) the conduct complained of amounts to oppression, unfair prejudice or unfair disregard (BCE Inc. v 1796 Debentures).

It is important to note that the reasonable expectations under the first part of the test are objective and all the facts specific to the action must be analyzed. The Court will consider the following factors when assessing if a reasonable expectation exists: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; any representations and agreements made by the parties; and the fair resolution of conflicting interests between corporate stakeholders.

It is important to note that this remedy is only meant for matters in which the Plaintiff can provide evidence to prove the Oppression Remedy claim. This relief cannot be used simply because one Shareholder wants out of the business.

  1. Remedies under the Winding-up Sections

Winding-up a corporation is when a corporation assets are liquidated, the debts are paid off, the remaining assets are distributed to the shareholders and the corporation is dissolved.  Under section 207 of the OBCA and section 214 of the CBCA (together, the “Winding Up Sections”) the court has the power to order the wind-up of a Corporation or make such an order available within their powers under the Oppression Remedy provisions in section 248 of the OBCA or section 241 of the CBCA, such as a forced buy-out.

The test for the court’s equitable winding-up power is that the applicant must show: (1) rights, expectations, and obligations that are not submerged in the corporate structure; (2) such rights, expectations and obligations must not have been satisfied; (3) the resulting circumstances result in unfairness or prejudice to one or more shareholders; and (4) such unfairness or prejudice is sufficiently serious that it can only be rectified by a winding-up or other oppression relief pursuant to section 248 of the OBCA or section 241 of the CBCA (as previously outlined above).It is important to note that the Plaintiff must meet each section of the test as described above.

In the 2020 decision of Macreanu v Godino, the court outlined occasions in which the court has ordered the wind-up of a corporation, including where: there has been a loss of confidence and trust between the parties, the parties in a deadlock, a breakdown in a relationship that is akin to a business partnership, major animosity, etc.

In conclusion, it is difficult to get out of a private corporation without a Unanimous Shareholder Agreement or a deal with the other shareholders. If a Shareholder wants to exit the ownership of a Corporation, they must have evidence to support a claim under the Oppression Remedy or Winding Up Sections or be able to successfully negotiate with the other shareholders. As such, it is best practice to establish a mechanism through a Unanimous Shareholder Agreement as early as possible to avoid a long and painful Corporate Divorce.

 Any article or other information or content expressed or made available in this Section is that of the respective author and not of the OBA.