Lawyers in Shareholder Litigation and Disputes

---

Shareholder Disputes

---

Whether you are a seasoned businessperson or just set up your first corporation, no one is immune to conflict between shareholders. We believe the best way to protect yourself is to anticipate and conclude a shareholders’ agreement as soon as a new business partner joins your company's shareholding. This way, you can decide in advance how to resolve disputes within your company. Unfortunately, it sometimes happens that a shareholders’ agreement does not apply to a particular scenario, or some shareholders refuse to sign or comply with it. To ensure good instincts in the event of a dispute, we believe that a well-informed shareholder benefits from learning about their rights and obligations in advance.

Indeed, the plethora of decisions regarding shareholder disputes illustrates that despite all the precautions and preventive measures a company may implement, it is still common for shareholders to have to resort to the courts to assert their rights. In many cases, disputes are likely to arise when the company is controlled by a majority shareholder or a group of majority shareholders who make decisions affecting the rights of minority shareholders. Other problematic situations arise when two shareholders each hold 50% of the voting shares of a company without a mechanism to resolve their eventual disagreement, such as a« shotgun » clause.

Whatever the nature of the dispute, a shareholder who believes he or she has been wronged by a decision made by the company or its directors will always benefit from making a request to obtain the information the company is obligated to provide. For example, all shareholders of a company can request access to the company's books and financial statements. Most of the time, access to this information will be key to the success of the wronged shareholder and will allow to determine the appropriate course of action to take.

There are several remedies provided in Business Corporations Act to assist a shareholder who wishes to exercise tighter control over the management of the company's affairs or who suffers harm due to its actions. We examine, in the context of this text, the request for an investigation, oblique action, the remedy for oppression, and application for dissolution of a company. Finally, we will complete our overview of available remedies by discussing the protections provided for minority shareholders by the Business Corporations Act (BCA), namely class voting and the right of redemption of shares.

---

The Available Remedies:

---

This section will familiarize you with the different remedies that shareholders of a corporation can exercise. It is important to note that in some cases, these remedies can proceed concurrently.

---

1) The Application for an Investigation

---

The corporate law provides for the possibility of a company's shareholder to request an investigation ordered by the court when certain criteria are met. This request goes far beyond the right of a shareholder to access the company's books and financial statements. Indeed, it allows for a formal investigation, especially when key information is concealed from the company's shareholders.

The investigation process is not a remedy and cannot alone enable a shareholder to correct a problematic situation. It is often a last-resort measure, pursued when other resolution methods have failed. However, it can be an interesting starting point for a shareholder who is seeking information to support their application for an oppression remedy or derivative action. If the opening criteria are met, the court that is seized with the request may, for example, appoint an inspector, allow them to visit places where information about the company is located, require the communication of information, hold a hearing, produce a report, and communicate it to the applicant once the investigation is complete. Finally, the law even provides that the costs of the investigation could in some cases be borne by the company.

A shareholder who has valid reasons to believe that a company in which they hold shares, or a company that is part of the same group (e.g., a management company), has committed fraud, acted abusively, committed dishonest acts, or has been unfair to the shareholders should consider requesting an investigation to ensure obtaining as much information as possible. To present their request, the shareholder must seize the court in the presence of the company's representative or in a private hearing, if appropriate. A shareholder intending to exercise this remedy is well-advised to seek the services of an experienced shareholder litigation lawyer to guide them in this process.

---

2) The Application for Remedy in Cases of Abuse of Power or Inequity: The Oppression Remedy

---

The application for a remedy in cases of abuse of power or inequity, also known as the oppression remedy, is a recourse that targets a wide range of situations by which the corporation oppresses a shareholder. The objectives of this request are simple: to put an end to the oppression and correct injustices.

There are countless situations that can lead to the exercise of the oppression remedy. Take, for example, a minority shareholder working within the family business for several years who experiences a personal conflict with family members who hold most of the company's voting shares. In such a scenario, it is easy to imagine that the majority shareholders might be tempted to use their position of strength to disadvantage or expel the minority shareholder. Another example of an oppression situation is when majority shareholders adopt resolutions or shareholder agreements that violate the law and apply them to harm a minority shareholder of the company. As a last example, consider a situation where a shareholder is harmed because another shareholder, acting as a director of the company, deliberately conceals information for fraudulent purposes or enters into contracts on behalf of the company to its detriment.

As you will see from these examples, the oppression remedy can be exercised when the company or its directors take or are about to take abusive or unfair actions against one or more shareholders of the company and these shareholders suffer prejudice as a result.

In other words, the shareholder must have reasonable expectations regarding the behavior of the company, and the company must act in a way that frustrates these expectations for the shareholder to use the oppression remedy.

Once the court is convinced of the relevance of the recourse, it can make any order it considers appropriate in the circumstances to rectify the situation. For example, the court could prevent abusive or unfair behavior, review the operation of the company, amend the bylaws or internal regulations, make changes within the board of directors, intervene in the conclusion of a contract, order compensation for the shareholders who have suffered prejudice, and even condemn the company to pay the fees and costs of the shareholder who initiated the remedy.

---

3) The Application for Authorization to Act on Behalf of a Company: The Derivative Action

---

The application for authorization to act on behalf of a company, also known as the derivative action, is a particularly useful recourse in situations where a shareholder, usually a majority shareholder, takes actions harmful to the corporation and, consequently, to the other shareholders of the company. Indeed, a shareholder who meets the opening criterion of the derivative action may either bring an action on behalf of the corporation or intervene in an ongoing action, even if they are not a director of the company and hold a minority of the voting shares.

There is confusion among shareholders between the oppression remedy and the application for authorization to act on behalf of a company. To help you differentiate them, understand that the oppression remedy aims to rectify a wrong caused by the company to a shareholder, while the derivative action aims to allow a shareholder to assert the rights of the corporation, especially when it suffers prejudice due to the behavior of the majority shareholders or directors of the company.

There are several situations where the use of this remedy could be beneficial for a shareholder or a group of shareholders. The typical case occurs when a majority shareholder, the sole director of a corporation, diverts assets belonging to the company's heritage and appropriates them personally. In this situation, minority shareholders would be well-advised to use the derivative action to ensure that the corporation recovers the sums illegally diverted by the shareholder.

Imagine another more complex situation that is likely to occur in everyday life. Take the example of two shareholders, one majority and one minority, who hold shares in a company that owns rental properties (Co1). In our example, the majority shareholder of (Co1) is also the sole shareholder of an operating company (Co2), which is a tenant of one of the rental properties of (Co1). If the majority shareholder, as the director of (Co1), decides not to collect the rent due by (Co2), the minority shareholder of (Co1) will be deprived of part of their profits. In this situation, the minority shareholder who learns of the majority shareholder's scheme could use the application for authorization to act on behalf of (Co1) to ensure that (Co1) collects the rent from (Co2) and ensure at the same time to obtain their fair share of the profits.

To be able to act on behalf of the company, the shareholder must first give a 14-day notice to the directors. They are not required to give this notice if all the company's directors are defendants in the derivative action. Subsequently, the shareholder must request authorization from the court to bring an action on behalf of and for the account of the company or to intervene in an ongoing action. Once these formalities are respected, the court must decide whether the shareholder can act on behalf of the company.

During the exercise of the derivative action, the court may, in particular, review the operation of the company, reconsider the composition of its board of directors, order an investigation, order that sums be paid to the shareholders who initiated the request, and even order that the company assumes the fees incurred by the plaintiff(s).

---

4) The Application for Dissolution of a Company

---

The application for dissolution may sometimes seem extreme, but in certain circumstances, it is the most useful recourse for resolving a dispute or an otherwise unresolvable situation. There are several reasons that can motivate a request for dissolution. For instance, section 461 of the Business Corporations Act (BCA) specifically provides that an interested person may request the dissolution of a corporation if it was formed fraudulently, illegally, or when its charter contains provisions that are non-compliant with the law, false, or incorrect. Another example is provided in section 462 of the BCA, which states that dissolution can be requested by any interested person when the corporation fails to comply for two consecutive years with the provisions concerning annual meetings, or it carries on its activities without respecting its articles of incorporation.

Although these examples are sometimes used to request the dissolution of a corporation, it is more useful to focus on the application of section 463 of the BCA, which provides for three situations in which a shareholder can present a request for dissolution:

First, a shareholder may request the dissolution of the corporation when it acts abusively against one or more of its shareholders. It is interesting to note that paragraph 1 of section 463 of the BCA includes all the essential elements that give rise to an oppression remedy. Consequently, a shareholder who wishes to request the dissolution of the corporation would be well-advised to file a separate oppression remedy since, if they succeed in convincing the court that they have been oppressed, the request for dissolution could be more favorable to them.

Second, paragraph 2 of section 463 of the BCA states that a shareholder could request the dissolution of the corporation if a unanimous shareholder agreement stipulates it. For example, it often happens that a unanimous shareholder agreement will provide that when there are several passive shareholders within a corporation and one shareholder who administers and manages the corporation's affairs, upon the death of the latter, the corporation may be liquidated at the request of one of the passive shareholders. It is practical to have such a clause when the managing shareholder has specific skills that cannot be replaced, or no manager is willing to take over after their death. This can avoid potential conflicts by providing for the possibility of dissolving the corporation.

Third, paragraph 3 of section 463 of the BCA provides that the court may order liquidation when it deems it to be a just and equitable measure under the circumstances. Although there is extensive case law in this regard, the most frequent event that can justify the use of this paragraph is a complete and total deadlock in the corporation's management. For example, two shareholders who each hold 50% of the voting shares of the corporation and who also equally administer the corporation. At some point in their business relationship, it is possible that the two shareholders no longer agree and are unable to choose a solution to settle their dispute. If the court deems the deadlock sufficiently serious, it may, if appropriate, pronounce the dissolution of the corporation.

When ordering dissolution, the court must first order the liquidation of the corporation's assets and claims. Although dissolution is one of the remedies provided by law, it is also possible that the court may order a different solution, less intrusive to the rights of the shareholders. The decision is left to the court's discretion, which, if necessary, can issue the same orders that are available when ruling on an oppression remedy.

As a result, a shareholder who holds 50% of the voting rights of a corporation and who is against another shareholder who also holds 50% of the voting rights may contemplate using the request for dissolution to resolve a deadlock situation. It is advisable for shareholders in such a scenario to seek guidance from a lawyer familiar with shareholder disputes who can provide detailed insights into the potential outcomes and legal ramifications of this approach.

Protection Mechanisms for Minority Shareholders:

Before the adoption of the new Business Corporations Act of Quebec, minority shareholders were in a precarious position and were often at the mercy of the decisions of the corporation's majority shareholders. The new law attempts to restore a balance between the rights of majority shareholders and directors to make important decisions and the necessary protection of the rights of minority shareholders. To illustrate this rebalancing of power, we present two measures provided by the law that are now available to minority shareholders when they disagree with the decisions made by the corporation.

---

5) Class Voting

---

Class voting is a mechanism provided by the law that allows shareholders to vote when certain decisions of the company significantly impact their class of shares, regardless of whether their shares have voting rights. Specifically, when the company adopts a special resolution that ends equality among holders of the same class of shares or infringes upon the rights of a targeted share class, the shareholders of that class will enjoy a distinct right to vote.

On such occasions, the shareholders of the affected share class will need to adopt a special resolution (usually two-thirds (2/3) of the votes) of the holders of shares of that class for the initial resolution that infringes upon their rights to be applicable. This mechanism, therefore, grants a veto right to shareholders of the affected share class.

If the shareholders of the affected share class adopt the special resolution, a dissenting shareholder who voted against this resolution could still benefit from the right to have their shares repurchased, provided certain formalities are met.

---

6) The Right of Repurchase and the Establishment of the Value of Shares

---

The right for a shareholder to request the repurchase of their shares is an interesting solution for a minority shareholder who opposes a significant operation contemplated by the company. It is an effective method that protects both the right of the majority shareholders to make significant decisions and the right of dissenting minority shareholders to withdraw from the company by obtaining reasonable compensation. Naturally, the availability of the right to repurchase is conditional on complying with the procedures set out by law.

The right for a shareholder to request the repurchase of their shares is limited to certain resolutions that have significant consequences for the company. For example, a resolution that provides for the expulsion of shareholders, one that restricts the company's activities or the transfer of shares, one that authorizes the sale of the company's assets in such a way that it cannot continue its activities, or one that approves a merger agreement, can lead to the opening of the right to share repurchase when other conditions are met.

Before the shareholder can request the repurchase of their shares, the company must first send them a notice indicating that the company intends to adopt a resolution that opens the right to repurchase. Then, the dissenting shareholder must notify the company within the prescribed period that they intend to vote against this resolution or that they intend to request the repurchase of their shares if they do not have voting rights on this resolution. When adopting the resolution, the shareholder must use all their voting rights to vote against the resolution.

Afterward, the company must send a repurchase notice to the shareholder in which the method used to evaluate the value of their shares is indicated. It is common for a provision concerning the determination of the value of shares to be provided in a shareholder agreement, which will then determine the applicable method. Upon receipt of the notice, the shareholder then has a period of 30 days to accept the company's offer. If they fail to respect the given period, the shareholder will be deemed to have renounced their right to repurchase.

If the shareholder disagrees with the fair market value established for the value of their shares, they can contest the company's evaluation, and the company can then submit a new offer, at its discretion. If the company refuses to increase its offer or the increase is insufficient, the shareholder may seize the court to determine the fair value of their shares. Once the offer is accepted, the company then has 10 days to pay the repurchase price offered to the shareholder.

Of course, this text is for informational purposes only and serves as a general source of information that cannot replace legal advice. Therefore, it is important to seek the services of a lawyer familiar with litigation and conflicts between shareholders. If your situation requires it, the team at Bessette Lawyers will be pleased to advise you in your procedures or represent you in your disputes with the company or its shareholders. We invite you to contact one of our lawyers for more information on this subject.