Shareholder Disputes in Ontario: Legal Claims and Effective Remedies

When it comes to corporations, shareholders play a crucial role as partial owners. Their primary interest lies in fostering a positive relationship with the corporation. However, what if disputes or wrongful conduct arise within the corporation? Fortunately, both federal and provincial legislation provide safeguards to protect the interests of shareholders and stakeholders in cases of corporate misconduct.

Before delving into the remedies available for aggrieved shareholders, it’s essential to consider two key aspects regarding the rights of shareholders and stakeholders:

Corporate documents such as shareholder agreements, articles of incorporation, by-laws, and contracts may hold precedence over legislated provisions.
Corporations may be incorporated in different jurisdictions, so it’s important to consult the relevant legislation for your specific case.

What Is a Shareholder?

Shareholders are individuals or entities that own shares (equity) in a corporation. These shares represent their ownership interest in the company. Shareholders are sometimes referred to as stockholders, equity holders, or stakeholders. Their role is critical in the governance and decision-making processes of a corporation, as they have a financial stake in the company’s success.

Shareholders may acquire their shares through various means, including purchasing them on the open market, receiving them as part of employee compensation packages, or obtaining them through private placements. Each shareholder’s ownership stake is proportionate to the number of shares they hold in relation to the total outstanding shares of the corporation.

Common Shareholder Disputes

Shareholder disputes are not uncommon in the corporate world and can arise for various reasons. Some of the most common shareholder disputes include:

Dividend Disputes: Shareholders may disagree on the distribution of profits in the form of dividends. Some may prefer reinvesting profits into the company, while others want to receive dividend payments.

Corporate Governance Disputes: These disputes often involve disagreements over the management and decision-making processes within the company, including issues related to board elections, executive compensation, and corporate policies.

Breach of Fiduciary Duty: Shareholders may allege that company directors or officers have violated their fiduciary duties by putting personal interests ahead of the corporation’s well-being.

Minority Shareholder Oppression: Minority shareholders may feel their rights are being oppressed by majority shareholders, resulting in a lack of influence and inadequate protection of their interests.

Valuation Disputes: Disagreements can arise over the valuation of shares during buy-sell agreements, mergers, or acquisitions, potentially leading to disputes regarding the fair market value of shares.

Mismanagement Claims: Shareholders may accuse company leadership of mismanagement, leading to financial losses, decreased shareholder value, or harm to the corporation’s reputation.

Addressing these common shareholder disputes requires a thorough understanding of corporate law and shareholder rights. Legal remedies and dispute resolution methods are available to protect the interests of shareholders and ensure the proper functioning of the corporation.

Understanding Shareholder Rights and Remedies Under Ontario’s Business Corporations Act

Ontario’s Business Corporations Act (OBCA) is a pivotal piece of legislation that governs the formation, operation, and management of corporations in the province. For shareholders, the OBCA establishes a framework of rights and remedies that are fundamental to their role as owners and stakeholders in a corporation.

Shareholder Rights Defined

The OBCA explicitly outlines various shareholder rights, ensuring that shareholders are afforded certain privileges and protections within a corporation. These rights include:

Voting Rights: Shareholders have the right to vote at general meetings, enabling them to participate in important decisions affecting the corporation.

Attendance at Meetings: Shareholders are entitled to attend and be heard at annual and special meetings, providing a platform for the expression of their views and concerns.

Access to Records: Shareholders can access specific company records, granting them insight into the corporation’s financial health, governance, and performance.

Enforcement of Shareholder Rights

Crucially, the OBCA doesn’t stop at merely defining these rights; it also empowers shareholders by providing legal mechanisms to enforce these rights when they are violated. In cases where shareholder rights are infringed upon or disregarded, the OBCA offers remedies and recourse for aggrieved shareholders.

Shareholder remedies under the OBCA encompass a range of legal actions and solutions. These can include, but are not limited to:

Derivative Actions: Shareholders can initiate derivative actions on behalf of the corporation if corporate directors or officers have engaged in wrongdoing or breached their fiduciary duties.

Oppression Remedies: In cases of oppressive or unfairly prejudicial conduct by the corporation or its management, shareholders can seek remedies that address these grievances.

Records Inspection: Shareholders have the right to request access to various company records, which serves as a powerful tool for oversight and accountability.

Voting Rights Enforcement: The OBCA provides mechanisms to ensure that shareholders’ voting rights are respected, including the annulment of decisions made in contravention of those rights.

These provisions within the OBCA are designed to safeguard shareholders’ interests and maintain the integrity of corporate governance. Understanding these rights and remedies is essential for shareholders to actively participate in the governance of the corporation and to seek redress when their rights are not upheld.

Derivative Action

Section 246 of the OBCA outlines that a “complainant” (a broad term which includes shareholders, officers, and directors), may start, defend, or discontinue an action on the corporation’s behalf. This is known as a derivative action.

To commence a derivative action, a complainant is generally required to obtain leave of the court and provide at least 14 days’ notice to the corporation’s directors. Obtaining leave can be costly and time consuming, which may deter multiple proceedings against a corporation. These procedural requirements function to screen out excessive and meritless claims.

Derivative actions are often brought by complainants to remedy wrongs that the corporation has done to itself rather than to an individual shareholder. A derivative action may be appropriate where management is not taking action in addressing a wrong it was involved in, and the wrongful conduct is affecting all shareholders equally.

The OBCA also states that the court may make “any order it thinks fit”. This may include an order authorizing a person to control the conduct of the action, an order giving directions for the conduct of the action, and an order requiring the corporation to pay certain fees (see sections 247-249).

Oppression Remedy

In contrast to a derivative action, the oppression remedy is a flexible and all-encompassing remedy meant to address a wrong that occurs to a complainant personally (OBCA, section 248). Oppression of a shareholder’s interest can range from conduct that is abusive, coercive, or bad faith to unfair disregard.

The oppression remedy’s popularity partly stems from the fact that it does not require leave of the court and it provides courts with the discretion to award a variety of creative solutions. For example, a court may compensate the oppressed party, appoint or remove directors, set aside a transaction, dissolve a corporation, direct an investigation, and require a trial.

The oppression remedy may be broad in nature, but it is not limitless. A complainant’s expectations must be legitimate and reasonable. Both concepts have been interpreted by the courts over the years.

The Difference Between a Derivative Action and the Oppression Remedy

A derivative action and oppression remedy are separate remedies. The Ontario Court of Appeal clarified the distinction between these two remedies in Rea v. Wildeboer. The oppression remedy is appropriate where the shareholder suffered personal harm and the relief sought is for the particular complainant. A derivative action is appropriate where the complainant seeks to relief for the benefit of the corporation – there is no allegation of the complainant’s individual interests having been affected.

Although distinct remedies, there are circumstances where a derivative action and the oppression remedy overlap. This creates murkiness around which remedy is appropriate, especially for small and closely held corporations. Even so, only one remedy will generally have to be pursued in cases of overlap.

Other Remedies

The remedies discussed above are not exhaustive. For example, the OBCA also contains remedies in relation to calling a shareholders meeting (section 106(1)), entitlements to be paid the fair value of held shares (section 185(4), and appraisal remedies. It is also important to note that there may be different remedies available under securities law for public companies.

How a Shareholder Disputes Lawyer Can Provide Guidance

Shareholder disputes can be intricate and multifaceted, often necessitating the expertise of a qualified legal professional to navigate the complexities of corporate law. A skilled shareholder disputes lawyer is an invaluable asset in resolving these conflicts effectively and efficiently. Here’s how such a lawyer can provide essential guidance:

Legal Understanding: Shareholder disputes can involve a myriad of legal intricacies, from interpreting corporate bylaws to understanding the nuances of the Business Corporations Act. A shareholder disputes lawyer is well-versed in the laws and regulations governing corporations in Ontario, ensuring that your rights are protected and your claims are pursued diligently.

Mediation and Negotiation: In many cases, shareholder disputes can be resolved through negotiation and mediation, avoiding protracted and costly litigation. A lawyer can act as a mediator, facilitating constructive discussions and working towards amicable resolutions. Their negotiation skills can help find common ground and reach settlements that benefit all parties involved.

Litigation Support: When negotiation fails to resolve the dispute, litigation may become necessary. A shareholder disputes lawyer can prepare and present your case in court, using their legal acumen to advocate for your rights. They will ensure that your interests are protected throughout the litigation process.

Derivative Actions: In cases where corporate directors or officers have engaged in wrongdoing, shareholders may have the option to initiate derivative actions on behalf of the corporation. A shareholder disputes lawyer can assess the viability of such actions and guide you through the legal proceedings.

Oppression Remedies: If you believe that the corporation’s actions have been oppressive or unfairly prejudicial, a lawyer can help you explore the available remedies. They will analyze the circumstances and advise on the most appropriate course of action.

Record Inspection: Shareholders have the right to access various company records to ensure transparency and accountability. A lawyer can assist in requesting and reviewing these records, identifying any irregularities or potential areas of concern.

Advice and Strategy: Your lawyer will provide expert legal counsel, helping you understand the best strategies to protect your rights and achieve your desired outcomes. They can assess the strength of your case, offer guidance on potential solutions, and assist you in making informed decisions.

Fiduciary Duty Assessment: Shareholder disputes may involve allegations of breaches of fiduciary duties by corporate directors or officers. A lawyer can evaluate these claims and provide legal guidance on how to address them.

In the intricate landscape of shareholder disputes, the support and guidance of a shareholder disputes lawyer are invaluable. They can help you navigate the legal terrain, protect your rights, and work toward resolutions that align with your best interests. Whether through negotiation, mediation, or litigation, a skilled lawyer is a steadfast advocate for your rights as a shareholder.

Contact Achkar Law

If you are a corporation or a shareholder and want to know more about the remedies available to shareholders and stakeholders, our team of experienced shareholder disputes lawyers at Achkar Law can help.