Most companies start out as closely-held entities, with a few principals holding all the shares and the key executive positions. Many successful businesses continue in this mode through decades of growth and change.
When serious shareholder disputes arise, they can be life-changing for company founders and for the business. In this situation, achieving the best and fairest resolution is vital to all parties.
Planning for the possibility of dispute
Companies should always be formed with the full awareness that founders' interests may one day diverge. Founding documents should provide for this possibility. Accordingly, a dissenting shareholder should consult company bylaws and the shareholder agreement to identify options for redress and any restrictions on his or her actions.
If differences prove irreconcilable, an aggrieved shareholder may wish to initiate "shotgun" or "put/call" options that are typical of most shareholder agreements. Under certain specified conditions, activation of a shotgun clause compels other shareholders to either buy out the dissenting shareholder or sell their shares to the dissenter. A put/call provision requires the company, rather than the shareholders, to buy out the dissenting shareholder.
Taking legal action
Short of departing the company, an aggrieved shareholder may wish to petition the court to prevent the board from pursuing a certain course of action or to compel them to take action. Courts can, for instance, order the company to process a shareholder proposal and order a shareholder meeting to consider the proposal. Where a company has no auditor, a shareholder may apply to the court to appoint an auditor.
If a shareholder believes the executive or board is acting in a way that harms the company, a shareholder may seek court permission (Business Corporations Act, section 232) to bring a derivative action on behalf of the company. Any award in a derivative action is made to the company, not the shareholder.
Where a shareholder believes the affairs of the company are being conducted in a manner oppressive to the rights of one or more shareholders, he or she may apply to the court for relief under the oppression remedies of the Business Corporations Act of BC, section 227. In such cases, the applicant must show that treatment of some shareholders is distinct from treatment of other shareholders and that this treatment has caused harm. If the court finds oppression has occurred it may make any order it considers appropriate to remedy the matter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
