Two friends open a business together, and for years nobody needs paperwork. One runs the shop floor and the other handles the customers and the banking. Then something shifts. A partner’s relative goes on the payroll. Dividends stop. Someone’s access to the accounting software is quietly removed. Eventually, one partner is locked out of a company that he or she partly owns, and each side has a completely different story.
Disputes of this kind are especially painful because they often mix money, friendship and sometimes family. The business that pays both people’s mortgages can also be the battleground. The choices made in the first few days, sometimes in anger, can shape the outcome for years.
What follows is general information on Ontario corporations, not legal advice for your circumstances. Each dispute depends heavily on the documents and on what the parties actually expected from each other.
First, Look at What You Signed
The earliest question is what the corporation’s documents say. Pull together the articles, by-laws, minute book and any shareholders’ agreement. A unanimous shareholder agreement under section 108 of the Business Corporations Act (Ontario), or OBCA, can even take powers from the directors and give them to shareholders.
Look for clauses that might control the outcome:
- Decision rules. Which decisions require unanimous or special approval?
- Buy-sell provisions. Is there a shotgun clause, letting one owner name a price at which the other must either buy or sell?
- Valuation. Does the agreement set a formula, or call for a valuator?
- Death, disability and departure. Must shares be sold if an owner stops working in the business?
- Dispute resolution. Is arbitration required? If so, a lawsuit might be stayed.
- Non-competition and non-solicitation. What may a departing owner do afterward?
If there’s no shareholders’ agreement at all, the statute and the general corporate documents fill the gap. In a 50/50 company, that frequently results in deadlock, because neither side can outvote the other.
A shotgun clause deserves special caution. It sounds fair on paper, but it favours whichever owner has better access to financing and information, and timing can matter enormously. Don’t trigger one, or respond to one, without advice.
Preserve Your Position in the Early Days
There’s a temptation to take dramatic action during the first week of a dispute. Moving company money “for safekeeping,” deleting emails, firing the other side’s relative or calling customers to give your side of the story may each come back to haunt you.
A calmer list usually serves people better:
- Copy documents you’re legitimately entitled to have, and don’t take what you’re not.
- Write a dated chronology while your memory is fresh.
- Keep paying attention to obligations you are personally on the hook for, including guarantees and remittances.
- Stay in role as a director or officer, and keep following your duties to the corporation.
- Put important requests in writing and keep your language measured.
- Get a lawyer’s advice before you resign from anything. Resignation may cost you rights or access, and can trigger clauses in the agreement.
If you have a personal guarantee on a bank loan or lease, make sure this forms part of any discussion. An exit that leaves you guaranteeing debts for a company you no longer control would be a serious mistake.
Your Right to Information
Shareholders often begin a dispute knowing very little. Ontario law gives them certain rights, including access to specified corporate records and to the financial statements put before annual meetings. Directors generally have broader access, since they need information to carry out their duties.
If the other side won’t cooperate, a formal written request is usually the first step. A court may make compliance orders under the OBCA. Any such application should be made on time. The Ontario Court of Appeal has confirmed that the two-year limitation period can apply to shareholder compliance applications, so a long wait carries a risk.
The Oppression Remedy
Section 248 of the OBCA is the main tool in Ontario shareholder disputes. It allows a complainant, such as a current or former shareholder, director or officer, and in some cases a creditor, to ask the court for relief when the corporation’s conduct, or the way its affairs or its directors’ powers have been exercised, is oppressive or unfairly prejudicial to the complainant or unfairly disregards the complainant’s interests.
The leading decision, BCE Inc. v. 1976 Debentureholders, 2008 SCC 69, sets out two questions. Does the evidence support the reasonable expectation the complainant asserts? And was that expectation violated by conduct falling within the terms “oppression,” “unfair prejudice” or “unfair disregard”?
Reasonable expectations are judged objectively and in context. In a small company, understandings about the owners’ roles can matter, alongside any shareholders’ agreement. Conduct that commonly produces claims includes:
- Removing a founder from management in breach of an understanding that the person would stay involved
- Cutting a shareholder off from financial information
- Paying oneself or relatives excessive compensation while dividends stop
- Diverting business opportunities or customers to another company
- Issuing shares to dilute someone
- Selling assets to related parties at unfair prices
Not every disappointment amounts to oppression, however. Courts don’t second-guess reasonable business decisions, and a shareholder who simply disagrees with the company’s direction may not succeed. A minority owner who never had a role in management can’t easily claim to have been promised one.
The remedies are broad. Section 248(3) allows a court to make any interim or final order it thinks fit, including setting aside a transaction, appointing a receiver, or ordering the corporation or another shareholder to buy the complainant’s shares. In small companies, a buyout at a court-determined fair value is often where these disputes end. Whether a minority discount applies will depend on the facts.
Other Statutory Routes
Derivative actions. The harm is sometimes done to the corporation rather than to one shareholder directly, as where a director diverts company funds. Under section 246, a complainant can seek the court’s leave to sue on the corporation’s behalf. In closely held companies the line between this claim and oppression can blur, and the appropriate choice is something for a lawyer to weigh.
Winding up. Section 207 lets the court order that a corporation be wound up on specified grounds, including where it’s just and equitable to do so. Deadlock in a two-owner company can raise this possibility. The remedy is drastic, though, since it may destroy the value everyone is fighting over, and courts often look for alternatives such as a buyout.
Dissent rights. When the corporation undertakes certain fundamental changes, such as some amalgamations or sales of substantially all its assets, section 185 lets a shareholder dissent and be paid fair value for their shares. The procedure is very strict, so missing a step can forfeit the right.
Compliance and rectification. Courts can also order compliance with the statute or corporate documents, and can correct the corporate records.
Where and How These Cases Run
For a Brampton corporation, oppression matters are usually brought in the Ontario Superior Court of Justice, and the Brampton courthouse at 7755 Hurontario Street is a common venue. Many proceed by application rather than action, which can be quicker where the facts aren’t heavily in dispute, although a contested factual dispute may need to be converted to a trial. If a valid arbitration clause applies, the case may belong before an arbitrator.
Urgent interim relief is available in appropriate cases. If assets are being moved or a shareholder is being shut out of essential operations, a court can be asked to preserve the situation until the matter is decided. Expect close scrutiny and bear in mind that delay can hurt your claim.
Limitations also matter. Ontario’s basic two-year limitation period has been applied to oppression claims, generally running from discovery of the claim. A continuing pattern of conduct may raise harder questions, but it isn’t safe to wait.
Costs can be significant. Valuators, forensic accountants and lawyers can run up considerable expenses in a contested case, and a business in dispute often loses value while it goes on. Courts can order costs against the unsuccessful party, but such orders rarely cover everything. That’s why many owners find a negotiated exit attractive, even if it’s not perfect.
Getting to a Deal
A majority of shareholder fights have the same real question at their core: who is going to own the business, and what does the other person receive? Framing the dispute this way, instead of around who behaved worse, tends to move things along.
Practical approaches include:
A without-prejudice meeting with each side’s lawyer. Settlement discussions are generally protected, and they can sometimes settle the matter early.
Mediation. A neutral mediator, ideally one familiar with business disputes, helps the parties reach their own deal. It’s private and often quicker than litigation. For family-run companies, mediation can leave room for relationships that may otherwise be lost entirely.
A joint valuation. If price is the sticking point, the parties may agree to retain a neutral chartered business valuator and be bound by, or at least consider, the result.
A structured buyout. Deferred payments, secured by a general security agreement or a share pledge, may make it possible for one partner to buy the other out when no one has cash available upfront.
Dividing the business. Sometimes each owner can leave with a location or a line of customers. A tax-efficient division often needs specialized planning.
A settlement should deal with more than a price. It should cover release of guarantees, return of company property, confidentiality, non-solicitation, tax treatment, what happens to a shared lease, and mutual releases. The tax result for the departing shareholder can vary a great deal depending on structure.
If You Haven’t Had a Dispute Yet
The easiest time to resolve a shareholder dispute is before it arises. A shareholders’ agreement signed while everyone is on friendly terms can set out how decisions are made, what happens if someone leaves or dies, how shares are valued, and how deadlock is broken. Such an agreement might feel awkward to raise with a friend or a relative, but it’s a far less awkward conversation than the one you might otherwise have later.
Our business litigation page covers the disputes side of this work, and our business formation and organization page covers agreements and structure. If a falling-out has started, it can help to speak with a lawyer before anyone takes a step that’s hard to undo.