Can a Demand for Share Redemption Lead to a Loss of Shareholder Attributes?

More Than a Simple Buyout

Shareholder agreements will contain, for example, a “shotgun clause” so that one shareholder can force another shareholder to withdraw, or provisions for automatic redemption in the case of withdrawal from the business, employment termination, or death.

In a situation where there is a dispute between shareholders, with one shareholder demanding to be bought out, either by exercising a mechanism established for that purpose or as oppression relief, the management powers that go along with holding shares can cause major irritants, especially for the shareholder who remains or operates the company.

The argument that we recently submitted to the Court in such a framework was to determine whether the exercise or application of a redemption mechanism could lead to the loss of certain shareholder attributes, thus limiting the power to control and manage which are attached to such shares.

Can a Shareholder Lose Certain Rights Following a Redemption Request?

In that case [1], the Honourable Stephen W. Hamilton, J.C.S. (now sitting at the Court of Appeal) found that the exercise of a share redemption mechanism can indeed cause a shareholder to lose some of his attributes. The case involved two shareholders who were seeking an injunction in commercial division to obtain, amongst other things, the calling of an annual shareholders’ meeting and the annual financial statements.

Considering that the redemption mechanisms in the shareholder agreement had been triggered due to the termination of the two shareholders’ employment with the company, the Court determined that there was no rationale for the shareholders’ application.

Justice Hamilton stated in particular that the two shareholders in question had lost several of their attributes as shareholders, notably the powers associated with the management of the company.

The Court considered that these shareholders had rather become creditors of the company and, accordingly, that there was no reason to force the application of the rights attached to the shares, and it dismissed their application [2]. A few months later, the Court of Appeal also denied them leave to appeal the first judgment.

An Overlooked Line of Case Law

The reasons for judgment in this case apply the principles of a jurisprudence that is not very well-known to practitioners, both litigators and commercial lawyers, notably in the following two decisions of the Superior Court: Berthiaume c. Joron [3] (the Honourable Jean-Yves Lalonde, J.C.S.) and Investissements L’O-Vin Ltée c. Ruel (the Honourable Jean Bouchard, J.C.S.) [4].

In Berthiaume, Justice Lalonde states that in principle, the rights of a shareholder who has exercised a redemption mechanism resemble more those of a creditor than an oppressed shareholder. In consequence, this finding restricts the rights of such shareholders to participate in the active life of the company, and also entails a reduction of their power to obtain certain corporate documents, a shareholder’s rights to same resulting from statutory provisions, unlike in the case of a creditor.

Continuing with his analysis, and finding that the shareholders’ agreement does not provide what status is to be ascribed to a shareholder who has exercised his right of redemption, Justice Lalonde adds that in such a situation, the shareholder can become a “trespasser” who might interfere with the smooth operation of the company and that the right to participate in the active life of the company is accordingly severely limited [5].

In 2006, the L’O-Vin [6] case went even farther, with Justice Bouchard stating that the exercise of the redemption mechanism definitely causes a shareholder’s status to revert to that of a creditor. Although this conclusion is harsher than that found in subsequent judgments, the three judgments’ common is as follows: the exercise of a redemption mechanism has direct consequences on a shareholder’s rights and on his shares’ attributes.

Key Takeaways for Businesses and Shareholders

It is easy to imagine the impact the redemption mechanism can have on a shareholder’s right to obtain certain documents, such as the full set of documentation behind the financial statements, or the right to demand that meetings be held. If such restrictions are imposed de facto, they can be particularly burdensome in the context of a dispute, for instance in a case where the shareholder demands the redemption of his shares because he has lost confidence in the company’s administration.

Accordingly, the advisability of demanding redemption as the conclusion of an oppression remedy, as well as the timing for doing so, are strategic decisions which must take into account all of the aforesaid considerations, risks, and factors. Ultimately, there is no reason in such instance not to better delineate or define shareholder status in the shareholder agreement, thus avoiding this type of uncertainty in future and crystallizing everyone’s rights. In this instance, this avenue is particularly attractive, in light of the knowledge that these principles are the subject of jurisprudence that is not only relatively new, but also rather rare.

Whether automatic or voluntary, the triggering of redemption thus becomes not only a highly strategic issue, but also a business decision to be weighed minutely and as a whole.

The Importance of a Well-Drafted Shareholder Agreement

This jurisprudence also highlights the value of carefully drafted shareholder agreements. Clearly defining the status, rights and obligations of a shareholder during a redemption process can help reduce uncertainty, prevent disputes and better protect the interests of all parties involved.

Whether voluntary or mandatory, the triggering of a share redemption mechanism is not merely a financial transaction. It is a strategic business decision with important legal and governance consequences that should be assessed carefully before any action is taken.

Need Assistance with a Shareholder Dispute?

Shareholder disputes can threaten a company's stability, growth and long-term value. Whether the issue involves oppression remedies, shareholder agreements, corporate governance conflicts, freeze-outs or share redemptions, our shareholder dispute team provides practical and strategic guidance tailored to your business objectives. We help shareholders, business owners and investors evaluate their options, protect their rights and resolve complex disputes efficiently through negotiation, dispute resolution and litigation when necessary.

Contact our shareholder dispute lawyers for advice tailored to your situation and business objectives.

[1] Steinberg c. Voizard, 2017 QCCS 3531 (leave to appeal denied in 2017 QCCA 1564).[2] Supra, note 1, in particular at paragraphs 30 and 31.[3] 2013 QCCS 2756.[4] 2006 QCCS 2657. [5] Supra, note 3, see in particular paragraphs 28 et seq. [6] Supra, note 4, see in particular paragraphs 31 and 36.