Dealing With Shareholder Disputes - The Legal Column by Ellyn La
Resolving Shareholder Disputes in Canada:
What can you reasonably expect?
Igor Ellyn, QC, CS and Orie Niedzviecki
Ellyn Law LLP, Business Litigation and Arbitration Lawyers
Toronto, Ontario - www.ellynlaw.com
This article is for information only and is not intended as legal advice. Legal advice is provided only upon consultation with a lawyer. Further information about the authors appears at the end of the article.
This article discusses the key issues affecting disputes among shareholders of private corporations in Ontario, Canada. The authors are partners of a Toronto boutique law firm which focuses on the litigation, arbitration and resolution of shareholder and other business disputes. A more complete discussion of this topic is found in an article by Igor Ellyn, QC and Karine de Champlain called "Shareholders Remedies in Canada".
Most businesses are incorporated because of the benefits of limiting liability and potential tax savings. Most businesses have more than one owner or shareholder and the relationship among the shareholders can spawn considerable disagreement. In a surprisingly large number of cases, the disputes among shareholders can lead to angry and complicated litigation with uncertain outcomes.
Shareholder disputes revolve around how the owners and managers of corporations deal among themselves. In this article, we discuss the legal issues which arise among shareholders of private corporations, typically with fewer than 10 shareholders. Who runs a corporation?
The people who have authority to make decisions for a business corporation fall into three categories:
1) Officers, who manage the daily business of the corporation;
2) Directors, who make decisions about legal matters affecting the business; and
3) Shareholders, the owners of the business, who have the final say about all matters. The officers, directors and shareholders may be exactly or mostly the same people.
Rights of Shareholders
Shareholders have three basic rights:
1) The right to vote at a valid shareholders’ meeting after receiving proper notice and documents;
2) The right to attend a meeting of shareholders; and
3) the right to accurate and complete information about the affairs of the corporation, including the articles of incorporation and any amendments, the directors’ register, the by-laws, minutes of directors and shareholders’ meetings and the financial statements, whether audited or not. When these rights are not respected, a shareholder may have a right to sue the shareholders who failed to respect the rights of the minority.
Shareholders are entitled to receive the financial statements of the corporation and to examine the books and records at the corporation’s head office. If there are more than five shareholders, the corporation’s financial statements have to be audited unless the shareholders vote to waive an audit.
The most important aspect of share ownership is "control". A shareholder or group who own the majority (more than 50%) of the voting shares will be in position to control the activities of the corporation subject to certain restrictions agreed among all the shareholders or imposed by law.
Some shareholder decisions, such as the sale of the entire business of the corporation require a higher majority or even unanimity. Minority shareholders have to accept that the majority shareholders have a right to run the corporation even if the minority disagrees. However, the majority must comply with the terms of a unanimous shareholders agreement, if one exists, and treat the minority shareholders fairly. The majority shareholders are not permitted to "oppress" the minority shareholders.
About the Author
Igor Ellynis the founding partner of Ellyn Law LLP and a senior commercial litigator. Called to the Ontario Bar in 1973, Mr. Ellyn was designated Queen's Counsel in 1985 and has been certified by the Law Society as a Specialist in Civil Litigation since 1989. To know about Toronto Business Lawyer please visit ellynlaw.com.
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