Working with business partners has its benefits, but it also has its challenges. It’s not unusual for small disagreements to bubble up with a business partner when dealing with the usual day-to-day stresses of running a business. But what happens if there is a more serious break-down in communication? What if your business partner wants to take the business in a direction you disagree with? What if your business partners try to squeeze you out of the business? In this article, we discuss some of the remedies available to small business owners who find themselves in a dispute with their business partners in an Alberta based business.
Shareholders, Officers, and Directors
“Business Owner” and “Business Partner” can mean different things to different people. Shareholders are the “owners” of the business, they are often entitled to be paid dividends from the corporation (a portion of the business’s profit) and, in some circumstances, entitled to vote for the board of directors. Generally speaking, Directors make the major decisions for the corporation, such as where the business will operate, and report to the shareholders. Officers take care of the day-to-day decisions of the business. In Alberta, it’s possible to hold one, two, or all three of these roles all at the same, and each of these roles have their own unique approach to the remedies discussed below.
We note that sometimes, over and above being a Shareholder, Officer, or Director, an owner may also be an employee of the corporation. Special considerations apply to the employment relationship, about which we do not comment in this article. Should you wish to explore this further, we invite you to contact a member of our Employment Law Group at McCuaig Desrochers LLP.
Unanimous Shareholders Agreement
Often, the best way to deal with potential disagreements is to prepare for them before they arise. In Alberta, if all the shareholders in a Corporation agree, the shareholders can enter into an agreement that provides for a number of different mechanisms to resolve disputes, including provisions that may compel shares to be bought or sold in certain circumstances. These agreements can offer shareholders some certainty and predictability about the parameters of their investment and how the corporation will run.
Whether you are thinking of starting a business, or whether you’ve been working with a business partner for most of your life, it’s never too late to consider a Unanimous Shareholders Agreement. Contact one of our lawyers in the Business Law Practice Group at McCuaig Desrochers LLP if you’re considering a shareholder’s agreement.
In some circumstances, whether you are a director, a shareholder, or an officer, you can ask a judge to resolve an issue between you, the other shareholders, officers, or directors, or even between you and the Company as a whole. This is typically called an “Oppression Action” which means that you are asking the Court to intervene because the action, inaction, or other conduct by the directors or officers of the corporation has occurred in a manner that is oppressive, unfairly prejudicial, or unfairly disregards your professional or business interests.
A major barrier to Oppression Actions is the “Business Judgment Rule”. The Business Judgement Rule means that the Court is unlikely to interfere with a decision if the actions of a director, officer, or the Corporation seem to be reasonable and motivated by the best interests of the Corporation. However, the Business Judgment Rule does not mean that the Court won’t remedy a dispute in some manner, as the Court has a number of different ways to craft a remedy to business disputes – such as ordering greater disclosure in the decision-making process. But the Business Judgment Rule does mean that the Court will generally respect that different people may make different decisions when running a business and that’s not something that needs to be interfered with.
Sometimes the Corporation isn’t doing what you want it to do. For example, maybe a supplier breached a contract, which in turn causes the Corporation to suffer losses, but the Directors refuse to take legal action against the supplier.
In these circumstances, you can ask the Court for permission to start a legal action on behalf of the Corporation. This is called a “Derivative Action”. The Court may grant you this permission if you prove that: you have a valid interest in the Corporation (such as being a shareholder); you have notified the Directors of your intentions; you are not acting maliciously; and that it appears to be in the best interests of the Corporation to bring the Derivative Action.
Derivative Actions can be started for just about any legal claim that a Corporation may be entitled to commence, even something as straightforward as a breach of contract. However, the Court is generally cautious about granting this remedy, as it is a substantial intervention in the business and operation of the Corporation.
We note that other options may also be available, in addition to Derivative Actions, including but not limited to Court ordered inspections, dissolutions, and other remedies.
If you have questions or concerns about your rights or obligations as a shareholder, director, or officer in a Corporation, please contact McCuaig Desrochers LLP’s Business Law Practice Group for guidance and assistance.
This article was written by Jeff Arsenault, a lawyer at McCuaig Desrochers LLP
©2021 McCuaig Desrochers LLP. All rights reserved. The content of this newsletter is intended to provide general information on McCuaig Desrochers LLP, our lawyers, and recent developments in the law and is not to be relied on as legal advice or opinion.