Patricia VircShareholder rights and remedies in a private corporation

January 2, 2020by Patricia Virc

Private companies often operate without a lot of concern for corporate governance and shareholder rights. Formalities such as annual meetings, financial statements and proper corporate approvals can be neglected because, firstly, managers may see these legal requirements as things that divert their time away from operating the business; secondly, shareholders and managers may have very little knowledge of their respective rights and obligations; and thirdly, these formalities have a cost.

Shareholders may be content with a very casual corporate governance situation while the business is operating well. But when company performance is poor, when shareholders who want participation in management are excluded from management, when management makes decisions which are viewed by non-management shareholders as not good for the company, when managers transfer a benefit to themselves or to certain shareholders that other shareholders consider improper, or when shareholders view managers’ compensation as too high, shareholders become interested in determining and enforcing their rights.

Shareholders have three basic rights: voting rights, rights respecting meetings and rights to access information. Corporate statutes in Canada require the directors to call an annual meeting not later than 18 months after the company comes into existence and subsequently not later than 15 months after holding the last preceding annual meeting. Shareholders are entitled to receive notice of the time and place of a meeting and, in the case of a private company, the notice period is 10 days.  Shareholders are entitled to receive financial statements at least 10 days before each annual meeting of shareholders. The financial statements must be audited, unless the audit requirement is waived, in writing, by all shareholders. The British Columbia Court of Appeal has recently held in Li v. Global Chinese Press that it is no answer to say that audit would be too expensive. Although that case involved a company incorporated under the Canada Business Corporations Act, this principle would be applicable to companies incorporated under the Ontario Business Corporations Act which has the same language. The financial statements must be approved by the board of directors and the approval must be evidenced by a signature of a director at the foot of the balance sheet. The financial statements must be placed before the annual meeting. The company is required to maintain, at a designated place, its articles and bylaws, copies of any unanimous shareholders agreement that exists, minutes of meetings and shareholder resolutions, a register of directors and a securities register. These records must be available for examination by both directors and shareholders. The company must keep adequate accounting records and minutes of meetings and resolutions of the directors. These records must be available for examination by directors.

If these formalities are not being observed, a shareholder can apply to the court for an order directing the company or any person to comply. The court may order a meeting to be called and conducted in such manner as the court directs, including the delivery of financial statements. In addition, a shareholder who is aggrieved by the manner in which management has conducted the business and affairs of the company can apply to the court for a broad range of other remedies. For example, the court can direct an investigation, make an order restraining conduct, appoint a receiver, amend the articles or bylaws or create or amend a unanimous shareholder agreement, direct an issue or exchange of securities, appoint directors in place of or in addition to all or any of the directors then in office, direct the company or any other person to purchase securities of a security holder, vary or set aside a transaction, order an accounting, make an order compensating an aggrieved person, rectify the registers or other records of the company or, in a very drastic situation, make an order winding up the company.

People tend to involve equity investors in their businesses without adequate consideration of the rights that shareholders have. When an entrepreneur funds a business with family money, asks another person to invest in her venture or when she compensates someone who works in the business with shares, she must consider that she has acquired an investor whose rights must be respected, even if the relationship goes sour or the employment relationship is terminated.

Patricia Virc

Steinberg Title Hope & Israel LLPSteinberg Title Hope & Israel LLP

Our Toronto based law firm offers its diverse clientele a broad range of legal services. We are proud to include on our client list both individuals and commercial clients, ranging from small businesses to multi-national corporations.

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