How minority shareholders in Ontario can use the Courts

By Amrita Mann

Minority shareholders in private Ontario companies are given substantial protection by the Ontario Business Corporations Act. In fact, one of the main purposes of the Act is to impose restrictions and limitations on private corporations and the people who control and govern them to protect minority shareholders and third parties. Let me briefly explain these provisionsThe act provides the following protection to minority shareholders:

1. Section 106: Minority shareholders may requisition the court to call a shareholders’ meeting

• The court may call for a meeting of shareholders of a corporation upon being formally requested to by a director or shareholder. It can do so when the corporation doesn’t call for such a meeting because it is impracticable.

2. Section 148: Minority shareholders can insist that a corporation have audited financial statements

• Upon a formal request by a shareholder, the court may direct a corporation to get its financial records audited if the corporation had sought and received an exemption its shareholders to get its financial records audited.

3. Section 149(8): A minority shareholder may apply to the court to have an auditor appointed

• If a corporation does not have an auditor, the court may, upon the application of a shareholder or the Director, appoint and fix the remuneration of an auditor to hold office until an auditor is appointed by the shareholders.

4. A corporation, shareholder or director may apply to the court to determine any controversy with respect to an election or appointment of a director or auditor of the corporation.

Upon an application, the court may make

• (a) An order restraining a director or auditor whose election or appointment is challenged from acting pending determination of the dispute
• (b) An order declaring the result of the disputed election or appointment
• (c) An order requiring a new election or appointment and including directions for the management of the business and affairs of the corporation until a new election is held or appointment made
• (d) An order determining the voting rights of shareholders and of persons claiming to own shares

5. Section 161(1): A minority shareholder may apply to court for an investigation

A security holder of a corporation may apply, with or without notice to the court for an order directing an investigation to be made of the corporation and any of its affiliates. The court may order an investigation if finds that

• The corporation has been carried on with intent to defraud any person;
• Its business or is being conducted in a manner that is oppressive or prejudicial to the interest of the security holder
• It been formed for unlawful purpose or is being dissolved for an unlawful purpose;
• Any person connected with the corporation’s formation acted fraudulently or dishonestly.

In addition to ordering an investigation, the court may also:

• Appoint or replace an inspector and affix the remuneration;
• Give notice to an interested person or dispense with such a notice;
• Authorize an inspector to enter premises to examine and make copies of documents and records;
• Order any person to produce documents or records;
• Order an inspector to conduct hearing, administer and examine a person under oath, and prescribe rules of hearing;
• Order a person to attend a hearing conducted by an inspector and give hearing;
• Give directions to an inspector or any interested person on any matter arising in the investigation;
• Order an inspector to make an interim or final report;
• Determine whether a report should be made public;
• Order discontinuing an investigation;
• Order to pay the costs of the investigation.

6. Section 246, 247: A minority shareholder may take over litigation the corporation is not prosecuting, or defend a lawsuit the corporation is not defending

A complainant may seek the court’s intervention to initiate action on behalf of the corporation or intervene in an action involving the corporation to prosecute, defend, and discontinue any action on behalf of the corporation.

The court may consent to such an action if it is satisfied that

• The directors of the corporation will not bring, diligently prosecute or defend or discontinue the action;
• The complainant is acting in good faith; and
• The action is in the corporation’s interest

The court may make an order

• Authorizing the complainant or any other person to control the conduct of the action;
• Giving directions for the conduct of the action;
• Directing that any amount adjudged payable by a defendant in the action shall be paid directly to former and present security holders of the corporation or its subsidiary instead of to the corporation or its subsidiary
• Requiring the corporation to pay reasonable legal fees and other costs by the complainant in connection with the action.

7. Section 207(1), (2), 208: A minority shareholder can apply for a court ordered winding up in certain circumstances, including unfair treatment at the hands of the majority

A corporation may be wound up by order of the court in the following circumstances

• (a) Where the court is satisfied that in respect of the corporation any act by the corporation, any business or any powers of its directors are oppressive or unfairly prejudicial to a security holder
• (b) Where the court is satisfied that a shareholder is entitled to demand the dissolution of the corporation following the occurrence of a specific event, and that winding up procedures have been launched against the corporation; the corporation has become insolvent, or there is another just and equitable reason for it to be wound-up
• (c) Where the shareholders by special resolution authorize an application to be made to the court to wind up the corporation.

A winding-up order may be made upon the application of the corporation or of a shareholder or, where the corporation is being wound up voluntarily, of the liquidator or of a contributory or of a creditor having a claim of $2,500 or more.