What happens when, in a closely-held company of three or more shareholders, the working relationship between two of the shareholders (only), has eroded so irreparably that the dysfunction has stymied the company’s business? Is it possible to include enforceable selective remedies in shareholders’ agreements that offer a path forward without neutral, non-disputing shareholders having to choose sides? i.e. this dispute is between the two of us, and one of us has to go.

We recently considered this issue and whether buy-sell shotgun provisions that operate between specific shareholders to the exclusion of others are enforceable. For the purposes of this discussion, such provisions will be referred to as “selective shotgun” provisions or clauses. The question uncovered an interesting change in the drafting of shotgun provisions over the past three decades.

Drafting Trends

In the 1990s, model shareholders’ agreements tended to provide for selective shotgun clauses as part of their “standard” wording. The wording allowed a shareholder to trigger a shotgun clause against a single other shareholder without requiring that offers be made to the shareholders at large. Current model forms have eliminated the concept without commentary.

Model wording (1990s): “any one or more Shareholders (an “Offeror”) may make an offer to any one or more of the other Shareholders (an “Offeree”) [… – shotgun provisions continue]”

Model wording (current): “any one or more Shareholders (the “Offerors”) may make an offer to the other Shareholders (the “Offerees”) [… – shotgun provisions continue]”

Although the Business Corporations Act (British Columbia), SBC 2002, c57 (the “BCBCA”) came into force in 2004, the timing appears to be more coincidental than influential, for reasons that will become clear in this discussion.[1]

Judicial Treatment and Standards

The change in drafting trends appears to be a result of a general shift in oppression jurisprudence over time. The oppression remedy under the BCBCA (section 227) includes grounds for relief from conduct that is “unfairly prejudicial” or “oppressive”. The term “unfairly prejudicial” was first incorporated into the statutory remedy under the British Columbia Companies Act, SBC 1973, c18. Prior to 1973, the only statutory ground for relief was oppression. British Columbia’s courts have since moved from the application of a subjective standard of review requiring an element of bad faith on the part of the respondent (“oppression”), toward a more objective equity-based test that considers the fairness of the result (“unfair prejudice”). They have now clearly established a distinction between “oppression” and “unfair prejudice”, with the latter including equitable considerations. Therefore, British Columbia’s courts have recognized the requirement to evaluate not just narrow questions of breach (of the BCBCA, the company’s articles, or contractual agreements), but also wider questions of fairness and the effect of the impugned conduct on the injured shareholder.[2] In addition, a standard of “unfair prejudice” does not require that malice or intent be established, as required with a standard of “oppression”.[3]

The apparent recommendation to draft modern shotgun provisions in a way that requires shotgun offers to be made to all of the other shareholders appears to be a response to more “equitable” analyses by courts over the past few decades. The trend seems to recognize equitable risks associated with cutting shareholders out of buy-sell shotgun offers, particularly where it could result in a new majority shareholder or disparities in the value of shareholdings (due to possible minority discounts).

Recently in BC,[4] and in Canada more broadly following the Supreme Court of Canada decision in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69,[5] a new standard focused on the “reasonable expectations” of shareholders has emerged as the starting point for the court’s consideration of any oppression application. The concept is again, one of equity, however in the specific context of shareholders’ agreements, it limits the success of related oppression claims on the reasoning that where a shareholders’ agreement is clear, so should be the reasonable expectations of the shareholders. However, there are instances where evidence qualifying the apparent literal meaning of a shareholders’ agreement has been accepted.[6] The courts have also confirmed that strict compliance does not mean perfect compliance.[7] Generally speaking however, the courts have held that where a shareholders’ agreement contains remedies for the conduct complained of that are similar to those sought under s. 227 of the BCBCA, the shareholder should pursue its rights under the agreement.[8]

Drafting Considerations

The current law suggests that the enforceability of selective shotgun provisions specifically, will be subject to legal scrutiny, however it does not suggest that they are patently unenforceable. Indeed, older existing shareholders’ agreements may contain the old model wording. When enforceability concerns arise, specific drafting considerations can be helpful.

Can Parties Contract Out of the Oppression Remedy Altogether?

A primary concern regarding selective shotgun provisions is the risk of an oppression claim being brought by a shareholder. In British Columbia, the decision in Cut & Run Holdings Ltd. v. Booze Bros. Holdings Inc., 2005 BCSC 167, is clear that in British Columbia, the ability of parties to contract out of statutory protections and oust the jurisdiction of the courts is unsettled law:

51 […] it is not necessary for me to consider issues of public policy that may arise from an attempt to “contract out” of the [statutory remedy] provisions of the [BCBCA].

52 I do not intend to determine that issue in obiter dicta since, in my view, such an important question should be decided with the benefit of full legal analysis in a known factual context.

53 I do, however, take the opportunity to observe that there is an apparent divergence of authority in relation to this “contracting out” issue which may one day have to be resolved in this province.

Justice B.M. Davies observed that the law in some Canadian jurisdictions may support an analysis which could allow for parties to “contract out” of the involvement of the courts in the enforcement of statutory rights and remedies if drafted in “clear, unequivocal language”. On the other hand, authorities in other Commonwealth jurisdictions appear not to support this approach. The issue has still not been decided in British Columbia, however the success of any attempt to contract out of statutory remedies seems unlikely. In the case of the oppression remedy specifically, where the objective is to supplement the rights of minority shareholders and protect them against risks lying outside what they may reasonably have expected at the time of becoming shareholders, it would be counteractive to allow the remedy to be ousted by a general contractual prohibition barring its application. [9]

Agreements: A Persuasive Tool for Establishing Reasonable Expectations

Notwithstanding the unlikelihood of being able to contract out of court involvement altogether, clear contract terms are highly persuasive in an analysis of whether the oppression remedy should be available since they are often determinative of the reasonable expectations of the persons concerned. Indeed, the Law Society of British Columbia’s Shareholders’ Agreement Drafting Checklist recommends that solicitors expressly include language to confirm what the reasonable expectations of parties are (or are not).

4.5 Consider reciting any particular reasonable expectations the parties may or may not have, or may expressly wish to exclude, as evidence in case of a dispute, including an oppression claim.

Drafting Tips for the Best Shot[gun] at Success

It is important to note that the enforceability of selective shotgun clauses specifically, has not been judicially considered. To optimize the enforceability of selective shotgun clauses, and to ensure the best chance of success, solicitors should consider the following:

1. Fairness and Equitable Considerations. Shotgun clauses were born from the aim and a need for fairness. Fundamentally, the rationale for the use of shotgun provisions is that a shareholder would not make an unfair shotgun offer because they would not make a shotgun offer that they would not be equally willing to accept. Fairness is at the heart of shotgun clauses and underpins their use and applicability; they will be subject to increasing scrutiny the further they deviate from objective perceptions of fairness.[10]
2. Clear, Unambiguous Terms (that can be followed precisely). “A shotgun buy-sell is strong medicine. One takes it strictly in accordance with the prescription or not at all.”[11] Put another way – a shareholder must strictly comply with the terms of a shotgun clause in order to obtain its benefit.[12] In order for a shotgun offer to be enforceable, it must comply strictly with the shotgun provisions and the procedure must be followed precisely. Therefore, shotgun provisions should be clear and well thought out so as not to create ambiguity, uncertainty or confusion (including in future circumstances, to the extent foreseeable). However, strict compliance is not perfect compliance, and the court will find compliance to be sufficiently strict if any elements of non-compliance are commercially insignificant in the context.[13]
3. Careful Drafting. Where fairness concerns do arise, they should be identified and addressed rather than quietly ignored. The courts are less likely to interfere where they are satisfied that agreements have been carefully designed, considered, negotiated and accepted by sophisticated and experienced parties.[14] A drafting goal for shotgun provisions should be to clearly establish the “reasonable expectations” of all parties. Solicitors may consider going so far as to expressly state what those reasonable expectations are where concerns regarding oppression arise.[15]
4. Operation. Incorporating pre-emptive rights into a selective shotgun provision may help restore equitable fairness, especially when faced with the possibility of creating a majority shareholder. Consider, for example, a situation involving three equal shareholders and a selective shotgun provision operating between two of them – the outcome would mean one of the two disputing shareholders (the “continuing shareholder”) obtaining a majority position through the acquisition of the other’s shareholdings (the “subject shareholdings”). The mechanics for incorporating pre-emptive rights into a selective shotgun clause involve incorporating a second offer step that requires the continuing shareholder to first offer the subject shareholdings to the other (neutral) shareholders, on a pro rata basis.
5. Valuation Mechanisms. Mechanisms prescribing that the shotgun offer price will be at (or above) “fair market value” have been popularly used in more recent years to help establish fairness. This can be particularly helpful in situations where disparities in financial resources among shareholders may exist or arise.
6. Shotgun Clauses Not Ideal for Different Classes of Shares. Shotgun clauses do not work well where shareholders all hold different classes of shares, because it introduces the potential for discrepancies in share value. While shares of different classes may have similar or almost identical characteristics, they are not objectively equivalent and additional lengths may need to be taken to clarify terms.[16]

Conclusion

Oppression claims are a prime risk to the enforceability of selective shotgun provisions (and other provisions in shareholders’ agreements). Over the past three decades, equitable considerations have become increasingly relevant in the evaluation of oppression claims. It is unlikely that parties will be successful in attempts to contract out of statutory protections and court involvement, however specific drafting measures can be taken to optimize the enforceability of selective shotgun clauses, as well as other provisions in shareholders’ agreements.

If you have any questions relating to this article, please contact Steffi Boyce or a member of our Corporate/Commercial Practice Group.

 

 

Footnotes

[1] Compared to its predecessor, the Company Act (British Columbia), RSBC 1979, c59, the oppression remedy provisions remain substantially the same, and the removal of statutory pre-emptive rights is irrelevant to share transfers.

[2] O’Neil v Dunsmuir Holdings (New Westminister) Ltd, [1980] BC J No 47; Nystad v. Harcrest Apartments Ltd (1986), 3 B.C.L.R. (2d) 39.

[3] Paley v Leduc, 2002 BCSC 1757.

[4] Paley v Leduc, 2002 BCSC 1757; Urquhart v Technovision Systems Inc, 2002 BCSC 172 paras 39-43, aff’d 2003 BCCA 45.

[5] BCE was decided under the Canada Business Corporations Act, RSC 1985, c44, but the discussion is still helpful when considered in light of the BCBCA. The Supreme Court of Canada created a two-step test for determining whether a shareholder has been subjected to oppressive corporate behaviour deserving of remedy. A full review of this leading decision is beyond the scope of this memorandum, but a summary of the test (with guidance regarding its applications in BC) is provided below for ease of reference.

STEP 1: What were the reasonable expectations of the shareholder bringing the application and were the expectations breached? In determining “reasonable expectations” (a) the complaining shareholder must subjectively identify their expectations, then (b) the court must determine objectively whether the expectations were reasonable.

STEP 2: If a breach of reasonable expectations is established, the court must then consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” (applicable under the BCBCA) or “unfair disregard” as set out in the governing corporate statute.

[6] Zhao v Zhao, [2016] OJ No 5463; Muscillo v Bulk Transfer Systems Inc, [2009] OJ No 3061, 61 BLR (4^th) 92.

[7] Western Larch Ltd. V. Di Poce Management Ltd., 2013 ONCA 722.

[8] ABOP LLC v. Qtrade Canada Inc., 2007 BCCA 290; also Western Larch Ltd. V. Di Poce Management Ltd., 2013 ONCA 722 paras 46-47 “It seems to me that the court should be reluctant to rescue a party who later regrets contractual arrangements that were carefully designed and accepted”.

[9] Halsbury’s Laws of Canada (online), Business Corporations, “Shareholder Remedies: The Oppression Remedy” XIV.2.(7) at HBC-302 “Impacts of Contracts and Arbitration Agreements” (2022 Reissue).

[10] Giffin v. Soontiens, [2011] NSJ No 581, an oppression case, is an example of when courts will interfere with a fully executed shareholders’ agreement that in and of itself, is not unclear. Extrinsic evidence was considered due to ambiguities in the share terms (different share classes) and the need for shareholder oppression relief to supersede contract terms. The corporation was a closely held (three shareholders), family company. That fact, together with the parties’ relationship, provided the plaintiff with a reasonable expectation of equal treatment since the plaintiff had previously been treated equally. The defendants made efforts to hide subsequent inequality from the plaintiff. The defendants were ordered to have the equity in the corporation valued as of the date of the plaintiff’s resignation and then purchase the plaintiff’s shares as an equal equity shareholder (despite differences in holdings among share classes and associated rights/entitlements). The court accepted that although the plaintiff signed the shareholder’s agreement, he did not fully understand it before signing. Moreover, given the equitable considerations, an oppression remedy was appropriate in the circumstances despite the existence of a shareholders’ agreement.

[11] Famously stated by Virtue J. in Trimac Ltd v C-I-L Inc, 1987 CanLII 3376 (AB KB).

[12] 942925 Alberta Ltd v Thompson, (2008), 47 B.L.R. (4th) 1.

[13] In Western Larch Ltd v Di Poce Management Ltd, 2013 ONCA 722, the shotgun offer under dispute contained alternative approaches to payment of outstanding debt. Alternative 1 was not compliant with the terms of the agreement, but Alternative 2 was. The agreement provided that Alternative 1 would be deemed to have been accepted where no choice was otherwise made. The courts would not enforce Alternative 1 due to non-compliance with the agreement, however because there was a compliant path offered, and the complaints by the appellants were minor, the shotgun clause was enforced.

[14] Western Larch Ltd v Di Poce Management Ltd, 2013 ONCA 722 at para 46.

[15] Law Society of British Columbia, Practice Checklists Manual, “Shareholders’ Agreement Drafting”, 4.5 (November 2023).

[16] In Sleight v. Cover-All Computer Holdings Inc., 1998 BCLG para 78,167, the respondent owned 100% of the Class A shares, which had voting rights but no dividends, and 40% of the Class B shares, which had a right to dividends but contained no voting privileges. The applicant held 20% of the Class B shares. The applicant delivered a shotgun notice to the respondent and offered $0.01 per share for the Class A shares and $13,333.33 per share for the Class B shares. Shotgun notices must comply strictly with the terms of the agreement. While the shotgun provisions were not unclear in literal terms, the different classes and holdings made it difficult to decipher what a compliant offer should look like – based on the offer the corresponding company valuations would not have made commercial sense. The court interpreted the provisions, incorporating logic based on what made commercial sense in the circumstances (i.e. price offered should be one price for both Class A and B shares). Accordingly, the court determined that the offer was not compliant. Consider also Giffin, supra, where the courts held that ambiguities in the share terms and oppressive conduct justified an equitable remedy that allocated equity in the company more or less equally among the three shareholders, regardless of the share classes held.