When Shareholders are in disagreement, what’s to be done?

Thinking about the lifecycle of a corporation, you might wonder - what happens when the shareholders disagree in one of the steps?

This happens often - common reasons include disagreeing on the timing or amount of dividends, or the composition of the Board of Directors, or other management issues. If there are a lot of shareholders, some might feel they’re being taken advantage of relative to other shareholders.

Imagine a situation where two shareholders each own 50% of a Corporation.  One shareholder hates the current directors and wishes to fire them all.  The other shareholder feels exactly opposite.  The Corporation can do nothing to settle the issue.  The current directors cannot know if they have enough power to act (50% of the shares say yes) or not (50% of the shares say no).  The officers are given no instructions.  The employees are given no orders.  The business grinds to a halt and the liabilities pile up while the assets start to disappear.

Many people will assume that the shareholders can simply sue one another and get the courts to settle the dispute.  There is sometimes the possibility of that – the Ontario Business Corporations Act does have a remedies sections referred to as “Derivative Actions” (when a shareholder wants to force the Corporation to fix a problem the Corporation has) and the “Oppression Remedy” (when a shareholder wants the Corporation fix a problem for that shareholder specifically).

These sections to permit the court to rule on a wide range of disputes – but there are also many situations where they cannot be used.  Worse, they are full-blown corporate litigation.  This is always expensive, often slow, and never preferred.

There are better tools available – one would be setting up the initial shareholder structure to give one shareholder absolute power while dividing the profits in a legally enforceable way.  This is famously what Facebook (now Meta) chose to do; no matter how widely divided the profits of the company, Mark Zuckerberg always remained the controlling mind of the business.  This is often a tough arrangement to sell to your fellow shareholders, however – they’re agreeing to put their money into someone else’s dictatorship.  Not everyone has the leverage and opportunity that Mr. Zuckerberg had.

The Corporation’s by-laws can also be drafted in a way that blunts the effect of disagreements by providing resolution built-int0 the business itself. These are usually set up at the “birth” of the Corporation without negotiation and are difficult to change without a majority shareholder interest - so they provide a reasonable way to address a dispute that binds all the shareholder equally, avoiding the perception of a dictatorship in the share structure.

Another tool is the Shareholder’s Agreement.  This is a much more common, fairly negotiated agreement between all of the shareholders to deal with common events like adding or removing shareholders, dealing with forced reinvestments, buyouts and sellouts and other common business events where shareholders can and often do disagree.  These are extremely important to negotiate ahead of time, because by the time a disagreement arises, it’s already too late to fairly negotiate a shareholder’s agreement! It’s a step that many shareholders of small businesses completely ignore, often to their detriment.

Disputes and disagreements are an important thing to consider as a new business owner - making sure there is a plan ahead of time (while everyone in the business is in a good mood and likely to agree) is much better than waiting for the disagreement to come up - it can be very difficult to get someone to agree with you on the rules to settle a debate when you’re in the middle of one!