Executors and Corporate Remedies

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Not uncommonly, Executors (or Administrators) find themselves in the position of a minority shareholder of a private company. For example, the deceased may have had a minority stake in a family business, was a “silent” business partner in a venture – having contributed start-up capital, or was one of several business partners, each with a minority stake. Often, the Executor knows little about the affairs of the company and does not have a personal relationship with the majority shareholder(s) and/or directors in control of the company. Although the Executor may need to liquidate the shares to distribute the Estate, they may be faced with a lack of co-operation from other shareholders or directors. For example, the company may not be producing financial statements, providing access to corporate records or holding annual general meetings (AGMs).

In these situations, the Executor needs to be aware of the rights and remedies available under the British Columbia Business Corporations Act (“BCA”).

First, the Executor needs to be aware of the entitlement of the deceased as a minority shareholder. There are three sources for shareholder rights:

  1. Minimum rights are set out in the BCA itself. For example:
    • sections 42 and 46 list various records that a shareholder is entitled to access, including lists of shareholders, directors, and previous resolutions passed by shareholders;
    • section 182 requires the company to hold AGMs;
    • section 198 requires the company, unless this requirement was waived by all shareholders, to produce annual financial statements; and
    • section 199 requires financial statements to be approved and signed by a director, and to include an auditor’s report.
  2. Additional rights may be set out in the Articles of the company. For example, shareholders may be entitled to full access to the company’s accounting records.
  3. Additional rights may also be set out in a Shareholders’ Agreement (if any), between the shareholders and the company. For example, the shareholders may have agreed that certain decisions of directors require majority shareholder approval.

Note that the Articles and a Shareholders’ Agreement may specifically limit the rights of a shareholder’s personal representative in comparison to those of the shareholder him- or herself.

Second, once the Executor determines the nature of the deceased’s rights as a shareholder of the company, they should request that directors of the company provide required information or take required steps. When the request is made in the context of a specifically identified right, there is a greater likelihood of compliance.

Third, if the directors refuse or ignore the request, the Executor will need to bring a legal action by way of a Petition, supported by an affidavit setting out the request made and the directors’ failure to comply. In bringing this Petition, the Executor will rely on one or both of the following legal rights under the BCA:

  1. Section 227 of the BCA provides what is colloquially known as an “oppression remedy”. This is the “Swiss army knife” for protection of minority shareholders. It operates on the basis of shareholders’ legal rights as well as reasonable expectations, and allows the court to apply equitable principles to ensure that minority shareholders are not treated in a way that is “oppressive” or “unfairly prejudicial”. These are open-ended concepts and wrongful conduct can take a myriad of different forms, including failure of directors to comply with requirements of corporate law.

    In the context of small companies, the oppression remedy can be used to compel the directors to comply with the BCA, the Articles, or a Shareholders’ Agreement. For example, in a recent decision in Red Line Enterprises Ltd. v. Six Mile Pub Ltd., the petitioner was a 5% shareholder in the respondent’s pub and was represented by one of the three directors on the board. The other two directors represented the majority shareholder and controlled the board. The majority directors stopped complying with the BCA by not holding AGMs, refusing to appoint an auditor, and failing to issue proper financial statements. These failures formed the basis for the oppression claim brought by the petitioner.

    The court found that this was “conduct of the affairs of the company in a manner oppressive to one or more of the shareholders” and the minority shareholder was “perfectly entitled to insist upon compliance with the provisions of the Act in order to protect its continuing minority interest” and “its proprietary rights demand nothing less”. Accordingly, the court ordered an AGM to be held and financial statements to be produced in compliance with the Act.

    More generally, under the oppression remedy, the court can “make any … order it considers appropriate”, including appointing a receiver, directing purchase of shares, ordering liquidation of the company, or ordering the company or a director to financially compensate the aggrieved shareholder. Where the majority shareholders have used the testator’s death to act against their interests, the Executor may use this section to seek compensation for the estate.

  2. Section 228 provides that the court can issue an injunction to direct a company, shareholder, or director to comply with the BCA or the Articles (but not a Shareholders’ Agreement). In contrast to the oppression remedy, this section only requires a shareholder to prove lack of compliance by the directors, not that the effect of this conduct was oppressive or prejudicial. Although this section has not been extensively considered judicially, it should provide a straight forward and relatively inexpensive and quick way to force compliance with the BCA or the Articles.

Following these steps, the Executor will ensure that the Estate is dutifully administered and its assets, including the shares, are properly protected.

If you have any questions about these matters, please contact the author, Seva Batkin, at sqb@cwilson.com