What happens if the shareholders of an Ontario corporation cannot agree and are deadlocked?

Shareholder deadlock is one of the most challenging situations in a closely held corporation, particularly when shareholders hold equal interests (such as fifty-fifty). When shareholders cannot agree on major decisions and no governance mechanism breaks the tie, the corporation can become paralyzed.

Several mechanisms exist to address deadlock. A well-drafted shareholders' agreement may include deadlock provisions: a shotgun clause (where one party offers to buy the other's shares at a named price and the other party must either sell or buy at that same price), a mediation or arbitration requirement, or a casting vote for the chair. These mechanisms are most effective when agreed to before a dispute arises.

If there is no contractual remedy, shareholders can apply to the Ontario court for relief. The most relevant remedies are the oppression remedy (where a shareholder argues that the corporation's affairs are being conducted in a manner that is oppressive or unfairly prejudicial to them), an order compelling the corporation to act, or in extreme cases, an order winding up the corporation. Court proceedings are expensive and time-consuming, which is why a well-drafted shareholders' agreement with deadlock provisions is the best preventive measure. If you are in a deadlock situation, getting legal advice promptly is important.