Can a Shareholder Be Forced to Sell Shares in Ontario?

Few things worry a shareholder more than hearing that the other owners want to buy them out, or sell the whole business over their objection. Whether you can be made to sell depends on what your shareholder agreement says, which corporate statute governs the company, and how the other owners have behaved.

This article walks through the main routes by which a sale can be compelled, and the situations where it cannot. It is general information, not advice on your situation, and the details of your own documents matter a great deal.

Start with two questions: which statute and which agreement?

Some Ontario private companies are incorporated under Ontario's Business Corporations Act (OBCA), and others are federal companies under the Canada Business Corporations Act (CBCA). The rules described in this article are CBCA rules, which apply only to federally incorporated companies. How the rules apply to an OBCA company depends on that statute, so do not assume a CBCA deadline applies to it. A lawyer can confirm which statute governs yours.

The second question is whether there is a shareholder agreement. Under the CBCA, a lawful written agreement among all shareholders that restricts the directors' powers to manage the corporation is valid, and a person who buys or receives shares subject to that agreement is deemed to be a party to it. That means buy-sell, drag-along and shotgun terms can bind new holders as well as the original signatories.

Forced sales that come from your contract

In a private company, the most common source of a forced sale is the shareholder agreement itself. These clauses are contractual, so the trigger, the price, the notice period and the closing steps all depend on the exact wording you signed.

• Drag-along clause: lets owners holding a stated portion of the shares require the others to sell on the same terms when a buyer wants the whole company.
• Shotgun clause: one partner names a price and the other must either buy at that price or sell at it.
• Event-based buy-sell clause: requires or allows a sale of shares when something happens, such as a death, disability or departure from the business.

Courts take these clauses seriously. In Western Larch Limited v. Di Poce Management Limited, the Ontario Court of Appeal said a shotgun offer must strictly comply with the clause that authorizes it before the offeror can obtain its benefit. The court also said that strict compliance is not perfect compliance and looks at the parties' commercially reasonable expectations.

The case also shows the cost of not responding. The offer was delivered on December 15, 2009, the recipient was treated as accepting the first alternative by silence, and closing took place on June 14, 2010 with about $33 million paid. A deemed-acceptance mechanism can bind a partner who does nothing.

Forced sales that come from statute or a court

The table below summarizes some CBCA routes that can lead to a forced sale or a court-ordered purchase, along with the limits on each.

If a squeeze-out notice arrives, the clock is short. The offeror must send notice by registered mail within 60 days after the bid terminates, and in any event within 180 days after the bid date. A dissenting offeree then has 20 days to transfer the shares on the bid terms or demand that a court fix fair value, and a holder who does nothing is deemed to accept the bid terms.

When you cannot be forced, and what protects you

If the company is being run unfairly toward you, the oppression remedy is the main protection. Under the CBCA, a complainant can include a current or former registered holder or beneficial owner of a security, a current or former director or officer, or any other person the court considers proper. A court may make an order if the corporation's acts, the way its business is conducted or the way directors use their powers is oppressive or unfairly prejudicial to, or unfairly disregards the interests of, a security holder, creditor, director or officer.

A court has many tools besides a buyout. It can restrain conduct, appoint a receiver, amend articles, by-laws or a unanimous shareholder agreement, appoint directors, set aside transactions, order compensation or order a liquidation. A complainant is not required to give security for costs, and the court may order the corporation to pay the complainant's interim costs.

You also have a separate exit right. A shareholder who dissents from certain actions, such as certain amendments to the articles, an amalgamation, a continuation or a sale of substantially all the property, is entitled to be paid the fair value of the shares. That is a right to leave on fair terms, rather than a way for others to force you out.

What to do next

If you think you may be pushed out, or you have already received a notice or offer, act before any deadline passes. Missing a response window can be treated as acceptance.

• Find out whether the company is federal (CBCA) or Ontario (OBCA).
• Collect the shareholder agreement, articles, by-laws and any amendments.
• Read any drag-along, shotgun or buy-sell clause and note every notice period.
• Keep every notice, offer and email, and record the date you received each one.
• Do not ignore a notice; silence can mean acceptance.
• Speak with an Ontario business lawyer, and with an accountant about tax, before you respond.

Frequently asked questions