Why Do I Need a Valuation? Shareholder Disputes

(Originally Posted June 29, 2017)

In an ideal world, business partners would always get along. Unfortunately, in reality there are often disputes between shareholders. And in some situations, it can be important to seek legal representation.

If you obtain legal representation, your lawyer may advise you to obtain a business valuation. There are two common reasons why they may recommend a business valuation to help resolve a shareholder dispute.

The Dissent Remedy – I Disagree with Major Changes to the Corporation

In some circumstances where a fundamental change has occurred in a business, a minority shareholder has the right to remove himself or herself from the corporation rather than be subjected to the changes. This is known as a “dissent remedy” and can only take place if certain triggering events occur, as set out in the Canada Business Corporations Act. As a result of the dissent remedy, the minority shareholder has the right to trade in his or her shares in the business for fair value.

For example, David owns 80% of a manufacturing corporation and Jennifer owns the remaining 20%. Without discussing the matter with Jennifer, David decides to sell the corporation’s building and all of the manufacturing equipment. Rather than remaining involved with the business, Jennifer could seek to exercise her legal right of dissent. If successful, she would be entitled to receive the fair value of her shares in the corporation. Jennifer’s lawyer would request a Chartered Business Valuator determine the fair value of her shares.

The Oppression Remedy – I’ve Been Treated Unfairly

A minority shareholder typically doesn’t have any legal control over the corporation’s activities. Because of this, it’s possible for a director or group of directors of the corporation to ignore the legitimate interests of the minority shareholder. This “oppressed” shareholder can seek what’s known as an “oppression remedy.” If successful, the courts can make any of a number of orders, including requirements to compensate the oppressed shareholder or purchase the oppressed shareholder’s shares.

For example, Richard owns a minority interest in a chain of appliance stores. Richard believes that Jake and Melissa, who are directors of the corporation, have been paying themselves excessive bonuses and making extensive personal purchases through the business each year. As a result, Richard believes his shares are worth less than they otherwise would have been. Because Richard is a minority shareholder, he has no control over the composition of the board of directors or over the actions of the individual directors.

Since Richard is unable to quantify the excessive compensation Jake and Melissa are receiving, he could engage a Chartered Business Valuator to determine the total excess compensation and the impact on his share value. Based on that information, Richard could seek an oppression remedy. If Richard is successful, the courts may order Jake and Melissa to compensate Richard for the decline in value of his shares.

If there have been disputes amongst shareholders in your business and a valuation would be helpful, give the experts at Davis Martindale a call. We’d love to work with you.