Can Majority Shareholders Force a Minority Shareholder to Sell in BC?

You hold the majority of the shares in a British Columbia company and a buyer wants all of it. One minority shareholder will not sell, or will not sell at the price on offer. You need to know whether that person can be made to sell and what your options are if not.

There is no single switch that forces a sale. The answer turns on what your documents say, which corporate statute applies and how the deal is built. This article explains the usual tools in plain words, shows why deal structure matters, and sets out what a minority shareholder may weigh on the other side.

This article covers the law of British Columbia.

The short answer: it depends on your documents and the deal

Majority ownership alone does not usually settle the question. What matters is what the shareholders agreed to in writing, what the company's own governing documents say, and whether a statutory process is available on the facts. Because these vary from company to company, it is worth having a lawyer read them before you promise a buyer 100% of the shares.

If a buyer insists on buying every share, a stuck minority holder can stall the whole deal. That is why the point is best raised early, before price and timing are fixed with the buyer.

The tools people usually look at

• Drag-along clause: a term in a shareholders' agreement that lets holders of a stated share of the company require the others to sell on the same terms as a buyer's offer. Whether it binds a minority holder depends on its wording and on whether that person signed the agreement.
• Whether and how it applies to a private BC company depends on the statute and the facts, so confirm it before relying on it.
• Negotiated buyout: the majority or the company buys out the minority holder at an agreed or independently valued price. This is often the most practical route.
• Change of structure: the company sells its assets instead of the shareholders selling their shares. The lifetime capital gains exemption is available only to individuals disposing of qualified shares (or farm or fishing property), and it does not apply where a corporation sells its own assets. Sale proceeds are also not all taxed as capital gains in an asset sale, so the structure changes the tax.

Each of these has conditions, and how they apply depends on your situation, so it is worth confirming with a lawyer which, if any, fit your company.

Why share sale versus asset sale changes the picture

A share sale transfers ownership of the company itself. An asset sale has the company sell its business assets. The two are taxed and regulated differently, so switching to an asset sale just to avoid a minority holder is not cost-free.

In a share sale, the employer corporation itself does not change, so it follows that employment would continue with the same employer, but this is a structural point rather than something the s. 97 guidance states, so it is worth confirming with a lawyer. In an asset sale, the buyer takes on the employer role and must honour each employee's length of service with the seller. A buyer of a business should also obtain a PST clearance certificate, or it can be liable for an amount equal to any outstanding amount owed by the collector.

What a minority shareholder may weigh

A minority holder deciding whether to sell will often look at tax. An individual who sells qualified small business corporation shares may claim a capital gains deduction, which is the least of four amounts set out in the Income Tax Act. To qualify, the share must be a share of a small business corporation owned by the individual, a spouse or common-law partner, or a related partnership. Throughout the 24 months before, it must not have been owned by anyone other than the individual or a related person or partnership.

The company must also have been a Canadian-controlled private corporation during that period, with more than 50% of the fair market value of its assets coming from qualifying active business assets or connected corporations. The deduction is reduced by cumulative net investment loss, and a person claiming it with investment income or expenses from 1988 onward must complete Form T936. The deduction can also be denied where the sale is part of a series of transactions involving certain dividends or a corporation or partnership acquiring property for significantly less than fair market value.

If the company holds a franchise, a disposition of shares in the owning corporation counts as a grant under the Franchises Act. A franchisor's right to approve a grant does not by itself mean the grant went through the franchisor, and each party owes a duty of fair dealing when exercising a right such as approving a transfer.

What to do next

• Gather the shareholders' agreement, articles, share register and any past amendments, and look for transfer, drag-along and buyout terms.
• Confirm who actually signed the shareholders' agreement and holds which shares.
• Ask a lawyer whether a drag-along clause or a statutory process is available and what steps it requires.
• Consider an independent valuation to support a negotiated buyout offer.
• Have an accountant compare the tax effect of a share sale and an asset sale for each shareholder.
• If a franchise, liquor licence or lease is part of the business, check the consent and approval steps before agreeing a closing date with the buyer.
• Do not sign a binding sale agreement for 100% of the shares until the minority holder's position is resolved.

Disputes between shareholders can become costly and slow. Getting advice before you approach the minority holder or commit to a buyer usually leaves you more options.

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