It is an all too common scenario that the board of a corporation decides to made a fundamental change to a corporation, such as, for instance, selling its assets or amending its articles to add a new class of shares. The board struggles to convince the necessary threshold of shareholders to vote in favour of the transaction, and then at the special meeting of shareholders called to approve it, one or two minority shareholders derail the conversation and threaten to sue the company for oppression or prevent the transaction from going through.
Practically speaking, these threats are typically overblown, and as a member of the board, or one of the shareholders in favour of the transaction there is often little to worry about, unless that shareholder can convince enough shareholders to vote against the transaction. Nevertheless, a little knowledge of Canadian corporate law can be useful in these situations to avoid getting bogged down by dissenting shareholders and to move through unproductive conversations during meetings. Specifically, in these cases, Canadian corporate law provides a very clear remedy for shareholders known as “dissent rights”, a remedy that is often little understood by board members and shareholders.
Shareholders’ dissent rights apply when a corporation is set to undergo a significant transaction (as defined in the relevant corporate legislation) and they give any shareholder the right to dissent from the transaction, and to force the corporation to purchase their shares for fair market value.
Shareholders’ dissent rights serve an important function both to the shareholder and to the corporation. From the shareholders’ perspective they provide important protection, allowing the shareholder to have an escape lever allowing them to exit the corporation on reasonable terms in the event that it undergoes changes so significant that the shareholder no longer wants to take part. From the corporation’s perspective this clear remedy prevents a shareholder from taking more significant action, such as suing the company, and with the knowledge of these rights the board can diffuse situations with difficult shareholders by simply directing them to exercise their dissent rights if they have concerns with the transaction.
One thing to note from the shareholders’ perspective is that the exercise of dissent rights requires that shareholders follow very specific procedures as set out in the Act. Any shareholder that intends to exercise its dissent rights should consult with a lawyer to ensure these steps are properly followed and that the shareholder can validly force the sale of its shares.
If you have any questions about these or any other rights of shareholders, directors or officers of a corporation, contact HazloLaw today.