Shareholder Disputes – EVERYTHING you need to know!

In a company incorporated in Quebec, there is no doubt that shareholders will play an important role. Indeed, they will notably make important decisions regarding the direction of the company.

However, even if they must constantly keep in mind the interest of the company, it remains that certain frictions between shareholders can have consequences on the operation of the company.

Thus, it is preferable for a company to quickly put an end to disputes between shareholders to ensure that they can return to their main concerns.

For this, there are many options available to you in order to put an end to potential disputes between the company’s shareholders. To choose the right solution, it will be necessary to take into consideration your situation and that of your company.

Avocats PME explains everything you need to know about shareholder disputes in Quebec!

What are the main causes of a dispute between shareholders?

A dispute between several shareholders must be taken seriously.

Indeed, even if business quarrels are more frequent than you might think, it remains that it is necessary to intervene quickly, especially since the reasons vary greatly between different situations.

Therefore, to be better prepared for potential conflicts, it can be interesting to learn about the possible sources of conflict between shareholders in order to quickly put an end to it.

First of all, it is quite possible that a dispute is caused by recent business strategies adopted by your company.

So, when a business strategy is adopted, it is quite common that not everyone agrees with it. Consequently, this can even become the source of a real discord between shareholders.

This is especially true if the company in question is considered a small or medium-sized enterprise (SME). Indeed, in this case, it is common for a small group of individuals to assume the roles of administrator, manager and shareholders. Conflicts are thus more likely to occur.

Probable causes of a dispute between shareholders

A conflict may be more likely to occur when some of the shareholders involved in the dispute also act as administrator of your company. From then on, it may be interesting to take this information into consideration if a dispute arises.

Then, another frequent source of dispute between shareholders is the direction of the company. Since companies are businesses that evolve constantly, it is normal that the direction does not always agree on all decisions.

In this situation, a conflict could quickly arise, particularly when the decisions at the heart of the conflict are related to the future of the company and the direction to take.

Finally, it is also common for such a dispute to arise because of a mode of workforce management.

Whether it concerns the company’s employees, their internal administration or the benefits granted to managers, there are several possibilities justifying the existence of a conflict.

Regarding aspects related to the management of the company, the conflict can arise from any decision. Therefore, it is strongly recommended to pay particular attention to this situation.

Why should we intervene in case of disputes between shareholders?

Your company is stuck with a conflict between shareholders and you think it will quickly and simply dissipate?

Think again! Indeed, in the event that the dispute takes an unexpected turn and ends up in court, the company could face heavy consequences.

One of the greatest principles of civil justice in Quebec is that it is open to all. Therefore, while this remains important, it is important to keep in mind that this can be a significant disadvantage for your company.

A dispute between shareholders can compromise the company.

Indeed, a dispute in court can pose a risk to the economic activities of your company.

If a conflict between shareholders arises, it is possible that this conflict may undermine the proper functioning of your company on a daily basis and, possibly, have an effect on its profitability.

Many economic partners will become reluctant to do business with your company if it finds itself in the public eye for the wrong reasons. Also, it is also possible that the dispute will force the shareholders and other parties involved to reveal certain information deemed confidential or sensitive.

Since the dispute is a public matter and the judge will want to have a global picture of the situation in order to make an adequate judgment, your shareholders may be forced to transmit information concerning the company and the source of the dispute. Once the information is transmitted to the judge, it is also available to the public.

Finally, regardless of the source of the dispute, there is no doubt that the public dispute will pose a serious risk to the stability of your company, particularly with business partners, but also within your company.

Shareholder Disputes - How to React Properly to the Situation?

When a dispute between shareholders arises, it can obviously take many forms.

For example, there may be a conflict of interest for a shareholder or a situation where the interests of the company are put at risk. Also, it could be a matter of a contentious share transaction.

No matter the reason leading to a dispute between the shareholders of your company, it will be possible for shareholders to intervene to end the situation. However, there is a significant risk that they may quickly put their foot in their mouth and, thus, force the dispute to rapidly deteriorate.

Thus, to have the best chances of resolving a dispute between shareholders, there are some good practices that promote resolution of conflict to avoid consequences for your company.

1) Do not waste time

First of all, it is preferable to intervene as soon as you hear about a potential start of a conflict. Normally, when the conflict begins, it can be assumed that the relations between the shareholders are at least cordial.

Therefore, you will be able to promote dialogue between the parties involved in order to find a solution without resorting to a resolution process that can be long and complex. This will also give you some room for maneuver in the negotiations.

However, even if it is preferable to act quickly to prevent the situation from worsening, this does not mean that you should act impulsively. Indeed, even if business relationships can arouse strong feelings in you, you should never let emotions take over in business.

If setting aside your emotions is a difficult exercise for you, it is possible to call on a professional to represent you and negotiate on your behalf in a rational manner. Thus, the professional you need is undoubtedly a lawyer specializing in business law.

To find this person, you can fill out the online form of Avocats PME for free and quickly!

2) Check your shareholders’ agreement

In the event that you are not able to quickly find a solution for a dispute between shareholders, the best solution is to open your shareholders’ agreement, if you have such a legal document.

A shareholders’ agreement is a document in which you establish the rules surrounding interactions between shareholders of a single company. Thus, although it is not mandatory to adopt a shareholders’ agreement, it is preferable for you to consider drafting this in order to foresee potential disputes to resolve.

For example, it will be possible for you to include a shotgun clause, allowing for a quick resolution of a dispute between two shareholders. Indeed, this clause will allow one of the shareholders to propose a price per share to his co-shareholder.

The latter can then agree to sell his shares at the indicated price or buy those of the shareholder who initiated the procedures relating to the shotgun clause. In both cases, it will not be possible to refuse the transaction from taking place.

3) Find a business law specialist lawyer

If the first two practices do not allow you to find a solution, the next step is to call on a lawyer specializing in business law. This lawyer can intervene even before a dispute arises and ensure that there is no situation that could lead to potential conflicts.

Indeed, the lawyer can take the time to reflect on the potential consequences associated with a dispute between shareholders, especially if it ends up in court, as it will now be a public matter.

Also, the lawyer can check if it is profitable for the longevity of your company to initiate a legal situation even before reaching the point of no return. In short, a lawyer specializing in business law is one of the best resources available to you.

To find the best lawyer for you, it is best to call on Avocats PME partner quickly!

4) Evaluate the value of your company

Finally, it may be important for you to assess the value of your company in the event that the dispute between shareholders intensifies and the only solution is for one of the shareholders to sell his shares in the company.

It is common, when a dispute between shareholders breaks out, that the only solution to this dispute is for one of the people involved to decide to sell his shares.

However, if the latter sells his shares, it is inevitable that he will try to get the best possible price…

Conversely, the other shareholders who have the opportunity to buy the shares offer significantly lower prices in order to take advantage of the situation. This could obviously exacerbate the dispute and possibly bring it into the public arena.

To resolve the situation, it is better to ensure that you have recently obtained an evaluation of the value of your company. However, since it is difficult to predict a dispute between shareholders, the best alternative is undoubtedly to provide at least the method to be used to evaluate the value of your company.

Thus, if necessary, you will be able to intervene quickly and, consequently, the shareholders will have to stick to the amount indicated by the evaluator after he has made an objective diagnosis of the situation.

Shareholder dispute - Opt for negotiation

If your company is facing a dispute between shareholders, it is important for you to find a solution as quickly as possible. However, it is usually preferable for the smooth running of the company that this conflict is resolved without taking unnecessary proportions.

Therefore, the very first step is to start a negotiation process, even before the dispute materializes. Indeed, negotiation will be an attempt to find a solution with the shareholders who are involved in the situation.

Normally, in the negotiation process, each shareholder will be represented by a lawyer in charge of defending his interests throughout the negotiations. Also, keep in mind that negotiation remains a voluntary process and therefore, you will not be able to force a shareholder involved in the dispute to sit at the negotiation table.

Having a shareholders’ agreement - What is it for?

Even though there are certain techniques to improve your chances of ending a dispute, this does not necessarily mean that you will be able to put them aside every time.

Therefore,if you are faced with a conflict between the shareholders, it is important to handle it right from the first moments. Indeed, the way you approach the conflict could have a significant impact on the rest of your dispute resolution process.

Thus, to find a solution to the dispute between shareholders, the very first step is to check if you have previously constituted a shareholders’ agreement. Whether you have this document or not can weigh heavily in the balance.

If you have a shareholders’ agreement

First of all, in the event that the company’s shareholders have previously concluded a shareholders’ agreement, it will be imperative that you are able to verify the content of it.

In many cases, it will be possible for you to find a mechanism that allows you to quickly resolve the dispute.

Particularly, if the document is properly drafted, it will be possible for you to find clauses imposing a procedure such as arbitration or mediation. To ensure that your agreement is well drafted, it is better to call on a lawyer specializing in business law.

If you do not have a shareholders’ agreement

However, since the shareholders’ agreement is not mandatory, it is entirely possible for a company not to have this type of document at hand when a dispute is initiated.

Nevertheless, you still have to find a solution to end the conflict and avoid potential heavy consequences for the company. Thus, you will have to refer directly to the remedies provided by the current legislation.

Be careful!

Since the law will intervene to find a solution to the dispute, it is possible that a court will intervene to decide.

In this case, the situation will not only require time and money, but it will also become public, which can have heavy consequences.

However, even before finding yourself in front of a judge to solve the problem, it is important to mention that it is still possible to find an out-of-court settlement, even in the absence of a shareholders’ agreement.

In Quebec, the _Quebec Business Corporations Act_will provide some remedies when shareholders are involved in a dispute.

For example, you will be able to choose from one of the three following remedies:

• Voting by share class,
• The relief action, and
• The derivative action.

Also, it will be possible for you to provide a dispute prevention and resolution mechanism in which you can include a process to resolve the entire conflict outside the court.

In this case, the main advantage is that the process remains confidential and you can avoid the heavy delays and legal fees associated with the intervention of a judge to find a solution.

Regarding the vote by share class, section 191 of the Business Corporations Act(BCA) authorizes the adoption of a special resolution in which it will be possible to infringe upon the rights conferred to a shareholder.

Thus, each share class, notwithstanding the voting right, will have to vote and obtain the approval of each type of shares. Consequently, it would be possible for you to end the dispute thanks to a special resolution.

Then, regarding the minority shareholder relief action, section 451 of the BCA will allow the latter to obtain a refund for his investments that allowed him to subscribe to shares when he feels aggrieved.

Normally, when a relief action, called an oppression remedy under federal law, is initiated, the shareholder will usually ask a judge for the repurchase of the company’s shares. However, the refund of the investment is an appropriate alternative in the event that the value of the shares is not possible to determine.

Finally, regarding the derivative action, it will be possible for a shareholder to act on behalf of the company in the event that the latter believes that the company is harmed by the board of directors or the other shareholders.

In this case, he will have to demonstrate that the company is currently not able to protect its own interests. Indeed, section 445 BCA requires the shareholder to obtain prior authorization from the court since the shareholder will now act for the company.

Not so fast!

To be able to initiate a derivative action, it is essential that you are able to prove that the directors have done nothing to remedy the situation.

Indeed, in this type of action, the shareholder is not directly harmed by the actions of the administrator. However, the company itself will be the victim of the actions taken by the administrator. Thus, it will be possible to initiate a dispute when the board of directors breaches one of its obligations of diligence or loyalty.

Finally, even though the derivative action gives a certain power to the plaintiff, the orders issued by the judge will be the following:

• The modification of the internal regulations,
• The replacement of the administrator,
• The modification of the company’s statutes, and
• The modification of the unanimous shareholder agreement.

Thus, it will be possible for the judge to directly interfere in the operation of the company in order to resolve the situation as quickly as possible and prevent the actions of the administrators from causing serious damage to the company.

What are the best clauses in an agreement to resolve a dispute?

Although a shareholders’ agreement is a document that greatly facilitates dispute resolution, it is important to draft it in a way that offers interesting solutions.

Indeed, since there are no legal formalities regarding the document, you can include whatever you want.

In fact, in many ways, the shareholders’ agreement will act as a contract between the parties involved. Thus, as long as the shareholders sign the agreement freely and with full knowledge, this document will be binding on them. Besides the shotgun clause mentioned earlier, here are two additional clauses to consider:

1) The arbitration clause

Another interesting clause for shareholders is the arbitration clause. This clause will obviously offer several advantages to the company as well as to the shareholders who are involved in the dispute.

One of the main advantages is that it will not be possible for shareholders to appear before the courts to find a solution to the conflict in question. This will also make the entire process more efficient and significantly reduce costs.

Moreover, since only an arbitrator will be present and this person will be bound by professional secrecy, you can be sure that the process will remain confidential, even after a solution has been found. This will therefore ensure that the company’s reputation will not suffer the consequences of the situation.

When it comes to drafting an arbitration clause, it is important to question yourself about your intentions regarding its application. Indeed, you can make this clause broad enough to cover the majority of disputes that may arise.

Conversely, you can also limit the use of the clause to a specific number of disputes listed in the shareholders’ agreement. Once chosen, keep in mind that it is always possible to modify the content of an agreement. However, this can be quite complex and therefore, it is better to take the time to identify your intentions in advance.

Then, the clause also allows you to establish the powers of the arbitrator as well as the process to follow in order to find a solution to the internal conflict of the company. Normally, there are two types of operating modes:

• Make a decision according to the law in force, or
• Reconcile the interests of the parties.

In short, it’s up to you to determine the terms surrounding the arbitration process to resolve a dispute between shareholders. However, since it is highly recommended that this clause accurately reflects the interests of your company, it is still preferable to consult a business law professional.

Thanks to Avocats PME, you can find the one who will be able to advise you quickly and without any commitment on your part! All you have to do is fill out the online form right now and you’re done!

2) The right of first refusal clause

Next, the second clause that can have a significant impact and facilitate the resolution of a dispute is undoubtedly the right of first refusal clause. This will normally depend on the willingness of the shareholders to actually want to sell their shares.

In Quebec, the right of first refusal will oblige shareholders who wish to sell their shares to first make a sales offer to the other parties signatories of the agreement. If none of the shareholders accept, they can then make an offer to a third party according to the terms of the agreement.

When making the offer to other shareholders, these latter will have the opportunity to acquire the shares in proportion to the ones they already own in this type of share category. In addition, a timeframe indicated in the agreement must be respected in order to declare your intention to acquire the shares.

After the internal sales process, all shares that remain without a buyer may be sold to a third party. However, the shareholder must still respect the terms of the agreement.

Unfortunately,when a dispute arises between shareholders, it is common for this to result in the departure of one of the parties involved. Thus, the right of first refusal allows you not to let a third party interfere in your business. Also, each current shareholder will be able to keep their share of the company in a proportional manner.

Best practices to avoid shareholder disputes

However, the best way to resolve a dispute between shareholders is to ensure that it never happens. Of course, since it is not within your power to prevent a shareholder dispute 100%, the best solution is to adopt good practices in advance.

Thus, it will be possible for you to prevent the shareholder dispute with the best mechanisms available. Therefore, here are 3 steps to follow to prevent a conflict in Quebec:

Make sure you have an agreement between shareholders

As you have probably noticed, it is important to have previously written and signed an agreement in which you have duly integrated all the relevant clauses to prevent disputes.

Indeed, it is entirely possible for you to include a dispute prevention mechanism in it. Particularly, the clause will dictate the procedures to follow in order to efficiently resolve the dispute as soon as it arises.

Also, when you are able to clearly establish all the rights of the company’s shareholders, you will be able to use the shareholder agreement to reduce to a minimum all possibilities of seeing a litigious situation being initiated within your company.

Update your shareholder agreement

After taking the necessary time to draft a shareholder agreement that includes prevention measures, it is not enough to simply put it in a corner and forget about it until a dispute arises.

Indeed, it is important to keep in mind that it is always possible for a company to proceed with the modification of an agreement between shareholders. Thus, since this legal document should always accurately reflect the reality of the company, it is strongly recommended to modify this document when necessary.

Therefore, it is recommended for a company to periodically check if the shareholder agreement has clauses that are no longer effective or if some are considered obsolete.

At this stage, it is important to consult a lawyer specialized in business law to assess the validity of your agreement and check if it is still up to date according to your business.

By filling out the online form for free from Avocats PME, you can find the professional you need quickly!

Implement a dispute prevention and resolution mechanism (DPR)

Finally, the last piece of advice that will allow you to prevent any possible shareholder disputes in the best way is undoubtedly to implement dispute prevention and resolution mechanisms (DPR) within your company.

Regardless of the option that seems most appropriate for your company, policies promoting the use of DPR mechanisms will allow you to avoid resorting to courts preventively.

This will thus allow you to save time and money throughout the process. However, the main advantage is that the company’s internal affairs will not have to become public by avoiding the dispute going before a judge.

In case of a dispute between shareholders, call on Avocats PME to find a lawyer!

Whether the shareholder dispute is about to occur or if it is already well established, it is important, as a business leader, to be prepared to intervene in order to protect your company.

Indeed, even if a small conflict may not have real consequences on the operation of your business, the opposite can also happen more quickly than expected. In a few days, a small conflict can escalate and cause irreparable damage to your project.

Therefore, calling on a lawyer specialized in business law will allow you to act in order to protect the best interests of your company. They can intervene upstream to settle the dispute

Also, thanks to their expertise, the lawyer can intervene if the dispute arises to ensure that your company is protected from all the possible consequences that could be caused by the conflict between shareholders.

Do you want to find a business law attorney quickly? To do this, the best option is to call on Avocats PME to find them for free!