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Dolgin Professional Corporation

David vs. Goliath – Strategic Considerations for Minority Shareholders in Canada

A significant part of my business law practice involves advising unhappy minority shareholder(s) of a company in the face of prejudicial and/or opportunistic actions being proposed by the company’s majority shareholder(s).

In some of these cases, the minority shareholders are the original founders of the company and no longer serve on the board and/or provide any employment or other services to the company and are truly on the “outside”.

In other cases, the minority remain active inside the company and retain board positions, etc.

Often the conduct proposed by the majority which may offend the minority include matters such as:

  • termination of employment/squeeze-outs;
  • unfair competition;
  • disproportionate compensation/corporate distributions;
  • significant equity dilution as part of a new corporate financing;
  • corporate reorganizations; or
  • asset sales or mergers/amalgamations with potential suitors.

Often these situations are truly the “David v. Goliath” scenarios of corporate law.

Perhaps you have found yourself in similar situations – whether as “David” or as “Goliath”?

In some cases, these situations are extreme and wind up in litigation or arbitration and involve allegations of statutory “oppression”, “bad faith” and/or breach of “fiduciary duty”.

In other cases, the majority’s conduct may be highly opportunistic but nonetheless properly adhere to all applicable corporate laws and are implemented in accordance with all required statutory/contractual approvals and fall short of oppression, bad faith and/or breach of fiduciary duty.

Whether or not the minority are able to negotiate a satisfactory outcome (which may include a buyout of their remaining equity) will depend on whether they can exercise any legal (i.e., statutory and/or contractual) rights and compel the majority to deal with them.

Without a legal or commercial reason to consider the needs of the minority, the majority may fairly assume they can ignore the minority and simply (and lawfully) impose their will.

Essentially, the key question to ask is “do the minority have a seat at the majority’s table?” by carefully examining the various legal agreements and statutory requirements that arise in the course of what the majority are proposing to do.

Sometimes it takes a bit of digging and creativity to create such a “seat”.

A negotiated outcome is more likely if the majority (and their counsel) can be convinced that:

  • legal approval from the minority is actually needed by statute or contract (i.e., a shareholder agreement);
  • the threat of escalation (i.e., litigation or arbitration) is real, unpredictable and not in their best interests; or
  • keeping the minority happy is beneficial for tax/business reasons.

[On this last point, I was once able to assist a disgruntled minority shareholder exit at a reasonably valued price because the majority (who didn’t need his approval to close a new refinancing) DID  require my client’s cooperation (i.e., signatures) to facilitate a pre-close tax reorganization that was extremely beneficial to the majority.] 

Here are a few examples of Canadian/Ontario statutory minority protections that minority shareholders may be able to use to gain negotiation leverage in David v. Goliath situations:

  • Board Conflicts of Interest – under Canadian/Ontario corporate law, directors who are parties to (or have a material interest in) a proposed material transaction (such as a new financing or reorganization) may be required to disclose their interest and refrain from voting in favour of such proposed transaction; where these rules apply, the minority may be in a position to block a required board vote on such proposed material transaction if they control a majority of the “disinterested” board.
  • Audit Rights – under Canadian/Ontario corporate law, a formal audit of a company’s financial statements is required (unless all shareholders agree in writing to exempt the company from this requirement); audits are quite expensive and the majority may not wish to incur this cost and may need minority approval to dispense with same.
  • Dissent & Appraisal Rights – certain corporate actions (e.g., amending articles, amalgamations, continuances into other jurisdictions and substantial asset sales) can only proceed if dissenting shareholders are properly granted statutory “put” rights to sell their shares at fair value; in these cases, while minority shareholders may be unable to “block” the majority’s plans, they may be entitled to exit the business at fair value if they properly follow the dissent and appraisal rules (which I note can be somewhat complicated and time-sensitive).
  • Class Voting Rights – amending a company’s articles in many cases requires 2/3rds approval of all shareholders and, in some very specific instances, there may be an additional requirement to obtain 2/3rds approval on a CLASS-BY-CLASS; hence founders/minority shareholders who control the common share class may be able to effectively “block” an amendment proposed by the majority preferred shareholders as part of a new financing.
  • Pre-Emptive Rights – while minority shareholders may be unable to “block” a new financing, they may have rights conferred under a shareholder agreement to participate pro-rata in a new financing and mitigate the dilutive effects of such new financing (assuming they wish to increase their investment in the company).
  • First Refusal Rights/Tag-Along Rights – often shareholder agreements will provide minority shareholders (who cannot otherwise block a transaction) with rights to either (i) acquire shares (pro-rata) from a departing shareholder (and preclude the departing shareholder’s exit through a 3rd party) or (ii) compel the 3rd party purchaser to additionally purchase the minority’s shares along with the departing shareholder.
  • New Shareholder Agreement – While many shareholder agreements include “drag-along” clauses compelling minority shareholders to participate in a 100% exit, they rarely have what I call “financing drag-alongs“; a financing drag-along typically compels minority shareholders to sign a new shareholder agreement imposed by a new investor as part of a significant new financing; hence, if the existing shareholder agreement does NOT compel the minority to sign up to a new shareholder agreement to close a significant new financing, the need to get ALL shareholders to sign the new agreement (to close the new financing) may be significant leverage for unhappy minority shareholders affording them the “seat at the table” they need to negotiate a favourable outcome; this assumes the new investor will not close without a new agreement signed by everyone (which may or may not be the case).

As you can see, there are several possible (non-litigious) avenues for minority shareholders to explore in the face of proposed unfair or opportunistic majority behaviour.

The above list is not exhaustive and each situation needs to be carefully reviewed on its own facts.

The key “takeaway” from this blog post is that, with some solid legal diligence and creativity, you can often discover statutory and/or contractual levers available to the Davids to help manage or block the Goliaths.

Litigation is ridiculously expensive and highly uncertain.

After all, judges are people too and are as flawed as any of us … and often do the unexpected.

Without disrespecting my many friends and colleagues who are very skilled and able litigators, often an experienced corporate lawyer can help find a suitable solution and avoid unnecessary escalation in these David v. Goliath situations.

Minority shareholders should consult with an experienced corporate lawyer at the very early stages of a potential corporate “show down” since the range of outcomes and potential levers can easily dissipate over the course of the dispute.






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