Soloway Wright LLP is frequently contacted by individuals as shareholders who are looking to understand their rights as shareholders and know what options are available to them to assert or enforce their rights, especially if they are minority shareholders. Many of the rights afforded to shareholders are determined by the corporation documents and potential shareholder agreements.
Understanding Your Rights
Shareholder rights can be given or taken away based on corporate by-laws, articles of incorporation, or shareholder agreements. Particularly, unanimous shareholder agreements can be used to vary these rights in significant ways. However, all shareholders in Ontario or Canadian corporations are provided the following basic rights:
- The right to vote on class-specific or major decisions;
- The right to receive notice of and attend shareholder meetings;
- The right to access information; and
- The right to audited annual financial statements.
In addition to the fundamental rights afforded to all shareholders listed above, there always must be at least one class of shareholders who have been provided (i) the general right to vote, (ii) the right to receive dividends, and (iii) the right to the remaining assets upon liquidation or dissolution.
Knowing Your Options
Given the varying rights and interests of shareholders and classes of shareholders, it is not surprising that conflict arises, either between shareholders or with directors of the corporation.
There are two statutory remedies available to shareholders when their rights are violated: an oppression remedy or a derivative action. Oppression and derivative action are two somewhat similar but very distinct legal remedies that should be carefully considered by shareholders looking to solve the problems they are having with the corporation.
Generally speaking, if your individual rights or interests as a shareholder are at risk or are being violated, then the appropriate remedy is an oppression remedy. This is a remedy you are exercising on behalf of yourself. If the collective rights or interests of shareholders are at risk or are being violated in such a way that the corporation itself is suffering, then the appropriate remedy is a derivative action, which allows you to bring a claim on behalf of the corporation.
In considering an oppression remedy, it is important to remember that there is no guarantee that every shareholder will benefit from every corporate decision, and, in fact, many may not benefit a minority shareholder. However, not all behaviour entitles a shareholder to an oppression remedy. One of the main factors that a court will consider in determining whether a behaviour was oppressive or not is fairness.
Conduct which has commonly led to a finding of oppression includes lack of adequate and appropriate financial disclosure; discriminating behaviour with the effect of benefitting majority shareholders in a way that causes harm to the minority; actions with the purpose of pushing minority shareholders out of the corporation; and failing to notify or allow a shareholder to participate in shareholder meetings.
Unlike oppression, the court has to pre-emptively approve a derivative action to commence a claim. In doing so, the court must be satisfied that the individual bringing forward the derivative action is qualified to do so, the corporation will not protect itself on its own, the derivative action is being brought in good faith, and it is being brought in the interest of the corporation.
Examples of derivative actions which receive court approval include the misappropriation of corporate funds by officers and/or directors; a breach of fiduciary duty by a director, manager, or executive owed to the corporation; instances of insider trading; decisions by directors that put the corporation at risk of potential liability; internal conflicts of interest or failure to give the appearance of arms-length dealings.
Although sometimes it may be obvious which remedy is appropriate, it can become convoluted, especially in closely-held corporations. It is important to seek legal advice in determining which remedy works for the facts of your situation. If you believe your shareholder rights are being infringed or a corporation in which you hold an interest is at risk, please contact one of our litigation lawyers to schedule a consultation.
Soloway Wright LLP is a community-based law firm with offices in Ottawa and Kingston. With over 75 years of experience, our team of over 35 specialty lawyers in Ottawa and Kingston offer a dynamic blend of knowledge and experience to clients requiring assistance with Business Law, Commercial Leasing, Commercial Litigation, Condominium Law, Construction Law, Corporate Finance & Securities, Employment, Labour & Public Law, Workplace Investigations, Environmental Law, Estate Planning & Administration, Insurance Law, Medical Malpractice, Personal Injury, Municipal, Land Development & Expropriation, Real Estate & Development, and Tax Law matters. Our goal is to bring your legal issue to an effective, affordable, and successful conclusion.
DISCLAIMER: This article is for general information purposes only and is not (and should not be construed as) legal advice. The information contained herein summarizes only certain aspects of the subject matter and is not a comprehensive review of applicable law. All of the foregoing is subject to legal and accounting advice based on the particular circumstances of each potential client.