Corporate decisions can have ripple effects throughout its hierarchy and substantially impact a corporation’s shareholders. For example, a corporation may choose to pursue a plan of action – such as selling its assets or amalgamating with another corporation – despite the objections of its minority shareholders. Ontario law empowers these shareholders to take legal action against the corporation based on their “dissent rights”.
When establishing a business’ structure and creating its corporate governance documents, a company must proactively address the rights and remedies available to its shareholders. Incorporating these key elements of the corporation-shareholder relationship into a forward-thinking shareholder agreement can help avoid costly disagreements in the future.
What are Shareholder Dissent Rights?
Section 185 of the Ontario Business Corporations Act (the “Act”) sets out the rights of dissenting shareholders. Shareholders’ dissent rights may be pursued when a corporation takes an action notwithstanding its shareholders’ objection. Sometimes called an appraisal remedy, dissent rights empower shareholders to demand a buyback of their shares at a fair market value.
When Do Shareholders Have Dissent Rights?
Shareholders have dissent rights in specific situations, such as those in the Business Corporations Act. For example, dissent rights may arise in circumstances where a corporation resolves to:
- Amend its articles or adds, removes, changes restrictions on the issue, transfer, or ownership of shares in a class or series of the shares of the corporation;
- Amend its articles to add, remove, or change any restriction upon the corporation’s business or powers;
- Amalgamate with another corporation;
- Be governed by the laws of another jurisdiction;
- Be governed by the Co-operative Corporations Act;
- Be governed by the Not-for-Profit Corporations Act; or
- Sell, lease, or exchange all or substantially all its property.
In the above situations, the shareholders who are entitled to vote on the resolution in question are the parties who may have dissent rights.
Why Do Dissent Rights Matter to a Corporation?
Dissent rights serve essential roles to the corporation and shareholders who enforce them. As a clear, enforceable remedy, a corporation can be assured that this generally prevents a shareholder from taking alternative action or commencing legal proceedings against the corporation.
With this knowledge, a corporation can encourage shareholders to invoke their dissent rights if they disagree with the proposed transaction to ensure a timely and efficient resolution of a dispute.
The Importance of Dissent Rights to a Shareholder
Knowing what dissent rights are and how and when to enforce them can be a powerful tool for a shareholder. With the understanding that there is a mechanism in place to allow a shareholder to exit a corporation on generally amicable terms, should the corporation seek to move in a direction which the shareholder does not agree with or does not wish to be a part of, a shareholder can have peace of mind concerning the decisions of the corporation.
How Does a Shareholder Exercise Dissent Rights?
In Ontario, a corporation must notify its shareholders of a proposed resolution that may trigger dissent rights before a shareholders meeting. The notice must contain sufficient information to allow shareholders to decide whether or not they wish to dissent from the resolution.
The below steps provide a general overview of the dissenting process. Dissenting shareholders should know that several intricate steps and strict timelines must be followed.
The Corporation Notifies Shareholders of the Resolution
Section 185(6) of the Business Corporations Act states that a shareholder shall send a written objection (Notice of Dissent) to the corporation at or before a shareholders’ meeting in which a proposed transaction is to be voted on. This requirement is subject to the corporation providing the shareholder notice of the meeting.
The Corporation to Notify Dissenting Shareholder of Resolution Adoption
If a corporation has passed and adopted the resolution, the corporation must notify any shareholder who objected to the transaction. The Confirmation Notice shall include the rights of the dissenting shareholder and the procedural steps to exercise such rights under sections 185(8) and 185(9) of the Business Corporations Act.
The Shareholders Submit a Demand for Payment
Once a dissenting shareholder has received a Confirmation Notice, they are subject to a strict timeline during which they must submit a Demand for Payment to the corporation seeking a fair value payment for their shares. After a Demand for Payment has been made, the shareholder is not entitled to participate in future successes and profits enjoyed by the corporation.
It should be noted that the Business Corporations Act provides a process by which a Demand for Payment may be withdrawn.
The Corporation Provides an Offer to Pay
Within seven days of the later of either receipt of the Demand for Payment, or the adoption of the resolution, the corporation must send the dissenting shareholder a written Offer to Pay. The Offer to Pay is required to include a sum, which is considered fair market value by the board of directors, of the dissenting shareholder’s shares, in addition to an explanation of how the value was determined. The fair market value determination may require assistance from a professional appraiser or valuator.
Accepting or Declining an Offer to Pay
The Offer to Pay will remain open for a set duration. If the dissenting shareholder accepts the offer, the corporation has 10 days from the acceptance date to pay the shareholder. If the Offer to Pay is not accepted while the offer is open or payment was not made, the parties may apply to a court to obtain the fair value of the shareholder’s shares.
A dissenting shareholder should consult with a tax professional to be fully apprised of the tax considerations arising from payment for their shares.
Consequences of Dissenting
Once a shareholder exercises their dissent rights, they lose all their rights as a shareholder, other than their right to be paid fair market value for their shares.
During the dissent process, the corporation may continue to conduct its usual business, including adopting resolutions and holding shareholder meetings. If a shareholder does not submit a Demand for Payment following their Notice of Dissent, they may continue to hold their shareholder rights and be included in the corporation’s ongoing business.
Contact Willis Business Law in Windsor-Essex County for Proactive, Comprehensive Shareholder Agreements
The knowledgeable business and corporate lawyers at Willis Business Law provide comprehensive, forward-thinking advice on the creation of business structures, including the drafting and review of shareholder agreements. By thoroughly assessing each client’s needs and preparing corollary agreements that anticipate possible risks and areas of future dispute, the firm helps clients avoid conflict and position their business venture for success.
Located in the heart of Windsor’s financial district and overlooking the beautiful Detroit Riverfront, Willis Business Law provides top-tier business law solutions to clients throughout Windsor-Essex County and the surrounding areas. To schedule a consultation with a skilled business lawyer, please call 519-945-5470 or reach out online.