Fair play in business: The rights of minority shareholders

As corporations operate on a system of majority rule, check a shareholder holding a significant number of shares has the power to manipulate corporate activity, there potentially at the expense of minority shareholders. As a result, the rights of minority shareholders are protected to ensure that they are not overlooked or abused by the majority. If you control a majority of shares in a corporation, you are required to consider the interests of not only the corporation, but also those of the minority shareholders before making certain fundamental corporate decisions. Minority shareholder rights are outlined in both the Canada Business Corporations Act (CBCA) and the Ontario Business Corporations Act (OBCA), and they apply to both private and public companies.

What is oppressive conduct?

Shareholder oppression occurs when majority shareholders take action that is unfair to the minority. It most commonly occurs in closed corporations; minority shareholders are particularly vulnerable here because they cannot escape mistreatment or exit the corporation by selling their stock on the open market.

The courts have identified a number of themes that describe oppression:

  • the lack of a valid corporate purpose for the transaction;
  • the failure to take reasonable steps to ensure an arms-length transaction;
  • the reasonable expectations of the minority shareholder in the context of the relationship between he/she, the company and other stakeholders;
  • lack of good faith on the part of the directors of the corporation;
  • discrimination among the shareholders with the effect of benefiting the majority shareholder to the exclusion or detriment of minority shareholders;
  • lack of adequate and appropriate disclosure of material information to minority shareholders; and
  • a plan or design to eliminate a minority shareholder.

Some examples of oppressive conduct include refusing to declare dividends, attempting a squeeze out, and denying the minority the right to inspect corporate records and books, making it necessary for the minority to sue every time it wants to look at them. An important concept in shareholder oppression is the “reasonable expectation” of the minority shareholder. And, while bad faith is not a requirement, if it’s proven that the majority acted in bad faith, this will certainly be considered in a decision

What are the potential remedies?

The oppression remedies available under the CBCA and the OBCA are some of the most powerful tools that minority shareholders have to protect their rights. Some commentators even refer to oppression remedy as the ‘charter of rights’ for corporate law. It is broad in scope and has gained traction in the past decade. The Acts permit the court to intervene and make any interim or final order it sees fit including:

  • a restraining order stopping the conduct complained of;
  • an order appointing a receiver or receiver-manager;
  • an order to regulate a corporation’s affairs by amending by-laws or creating or amending a unanimous shareholder agreement;
  • an order directing an issue or exchange of securities;
  • an order appointing directors in place of or in addition to any of the directors in office;
  • an order directing the corporation or any other person to purchase the securities of a security holder;
  • an order directing a corporation pay a security holder any part of the monies that the security holder paid for securities;
  • an order varying or setting aside a transaction or contact;
  • an order compensating an aggrieved person; or
  • an order liquidating and dissolving the corporation.

It’s clear that corporations should consider carefully the impact of decisions and activities with respect to the rights of minority shareholders.

Lawrence Silber