Overview and Key Practical Takeaways
In a development noteworthy for private equity (PE) and other sophisticated investors, the Ontario courts have ruled on the ability of shareholders to waive dissent rights under the Ontario Business Corporations Act (OBCA).
Key practical takeaways include:
- Carefully drafted unanimous shareholder agreements attract significant judicial deference.
- OBCA statutory dissent rights can be waived provided “clear and direct language” is used.
- While it may not be necessary to specifically reference the exact rights being waived, direct substantive overlap or conflict between the waiver under the unanimous shareholder agreement and the right in question is likely required.
- The rulings illustrate the importance of (1) the factual matrix to the waiver analysis, and (2) ensuring an absence of conflict between the terms of the unanimous shareholder agreement and the articles of the corporation.
- While the rulings address only the waiver of statutory dissent rights, given the broad scope of the waiver the courts held enforceable, the rulings suggest a waiver of other shareholder statutory rights may be possible, provided not contrary to public policy.
Our more detailed review and comments follow. For more Fasken thought leadership on PE, corporate governance and M&A, visit our Capital Markets and M&A Knowledge Centre.
The Factual Background in Brief
The rulings arose out of an estate dispute among family members regarding a holding company incorporated under the OBCA with a portfolio of real estate assets. Upon the father’s passing, the four children each held 25% of the company’s non-voting common shares, and the father’s estate, administered by the mother and four children, owned all of the company’s preferred voting shares. Although all four children and the mother were trustees, the mother was granted a veto to maintain control over the estate, and by extension the voting shares in the company.
Two years after the father’s passing, the holding company was amalgamated with an affiliated company and, in addition to the articles of amalgamation (the Articles), the family shareholders executed a unanimous shareholders agreement (the USA). In contemplation of the father’s will, USA section 3.01 granted the mother, in her capacity as trustee, “sole and exclusive discretion” to cause the company to sell all or substantially all of its assets.[1] Section 9.01 of the USA stated the shareholders waived “such provisions of the [OBCA]… which may be in conflict with the provisions of [the USA].”[2]
Ten years later, the mother sought to wind up the company and liquidate its assets, and all of the trustees with the exception of one daughter voted in favour. When the mother and the trust moved forward with the liquidation, the daughter argued she was entitled to exercise dissent rights under OBCA section 184(3), including because the Articles expressly referenced this section. The other family members contended the daughter’s OBCA dissent rights had been waived by sections 3.01 and 9.01 of the USA.
The Arguments of the Parties
Relying on precedent,[3] the daughter’s principal argument was that OBCA dissent rights cannot be overridden “without clear and express language,” and that the USA’s terms did not meet this standard.[4] She argued that, while USA section 3.01 empowered the estate to trigger the disposition of all of the company’s assets, this did not preclude the concurrent operation of her OBCA dissent rights. She also argued that her interpretation avoided conflict between the USA and the Articles.[5]
The family emphasized the grant to the mother as trustee of the estate of “sole, exclusive and absolute discretion” regarding the sale of the company’s assets by USA section 3.01 and that any conflicting provisions of the OBCA had been waived per section 9.01.[6] They also emphasized related provisions of the USA obligating the shareholders to “fully cooperate” to give “full effect to the purpose and intent” of the USA.[7] They highlighted the purpose of the USA was to give effect to the father’s will and grant the mother ultimate decision-making authority to “prevent deadlock between the four children.”[8] Regarding the express reference in the Articles to the OBCA dissent rights, the family argued reliance on the Articles was precluded by the USA’s “entire agreement” clause at section 10.01.
The Ruling of the ONSC
The Ontario Superior Court of Justice (ONSC) began by citing three related Supreme Court of Canada (SCC) rulings. First, that parties can contractually waive statutory rights, provided such waiver is not contrary to public policy.[9] Second, that contracting out of a statutory provision “must be done by clear and direct language…”[10] Third, that contracts must be interpreted in light of their surrounding factual matrix.[11]
Turning to the USA, the ONSC held it was “not a long or complicated document” and that the language used in sections 3.01 and 9.01 was “clear and unambiguous.”[12] Moreover, the ONSC held the shareholders had, in executing the USA, “put their minds to granting [the mother] sole discretionary power to sell [the company’s] properties.”[13] The result was that the daughter’s argument could not succeed, “especially” because USA section 3.01 addressed the “very situation” contemplated by the reference in the Articles to OBCA dissent rights.[14]
In effect, the ONSC determined that, because of the “direct conflict” between the USA and the reference in the Articles to OBCA dissent rights, the “language” of USA sections 3.01 and 9.01 was “sufficiently clear to oust the dissent rights…”[15] To accept the daughter’s argument would ignore the parties’ “reasonable expectation” upon execution of the USA that the dissent rights would not apply and “would render section 3.01 meaningless.”[16] In addition, the ONSC noted those provisions of the USA requiring the shareholders to “give full effect to the purpose and intent” of the USA also reinforced this conclusion.[17]
Regarding whether a waiver of dissent rights would be contrary to public policy, the ONSC cited the SCC in explaining it saw no evidence USA sections 3.01 and 9.01 were unconscionable.[18] The USA “reflected the intention” that the closely-held, family company would be managed in accordance with the father’s will, including the grant of a veto right to the mother.[19] The daughter had the opportunity to seek legal advice before signing the USA and she did not argue that she had not understood or disagreed with its terms.[20] There was “no basis to suggest” USA sections 3.01 and 9.01 were “inherently unfair in the context of this family and its business.”[21] Nor had any caselaw been submitted holding that waiving OBCA dissent rights is contrary to public policy.[22]
However, the ONSC noted certain caveats. It made “clear” its conclusions “only applied” to the sale of the company’s assets and that “to the extent” the mother sought to divest company assets “in some manner other than a sale,” such as by way of a transfer in kind, USA section 3.01 would not apply.[23] This was because the evidence did not establish that a transfer in kind was “contemplated by the shareholders” when executing the USA.[24] Nor did the “language” of the USA provide the mother “with authority to unilaterally impose or cause such a transfer or exchange onto the common shareholders, without their approval.”[25]
The Ruling of the ONCA
The affirmation of the ONSC’s ruling by the Ontario Court of Appeal (ONCA) was relatively brief and focused on the underlying purpose of the USA. It held:
The application judge’s interpretation reflects the clear language of the USA. Importantly, it is in keeping with the constituent purpose of the [company], namely, to manage and operate [the father’s] assets in accordance with his will, including the veto granted to [the mother] so she could maintain control over the corporation. In this context, the waiver of any dissent rights that could prevent the orderly distribution of the estate’s assets is entirely reasonable and in keeping with the objective intention of the parties as expressed in the USA.[26]
Key Practical Takeaways for Drafting Shareholder Agreements
What are the key practical takeaways for PE and other sophisticated investors in drafting and negotiating shareholder agreements? We highlight seven.
- On one level, the dispute involves a different context than PE investment, namely a family-owned business without institutional shareholders. However, on another level, the dispute shares important parallels to common PE investment structures, i.e., a dominant investor with broad decision-making authority over exit events such as a sale of substantially all of the company’s assets. As such, it is not unreasonable to expect future courts to apply the ONSC and ONCA rulings in the PE context.
- Referencing SCC precedent, the rulings affirm that waiving rights under corporate statute requires “clear and direct language.” However, the ONSC did not require express reference to shareholder dissent rights under the OBCA for them to be waived. It was sufficient that there was direct substantive overlap between the authority granted under the USA and the statutory right being waived. This indicates that a broad grant of authority to a particular shareholder or group of shareholders, coupled with a robust waiver clause, may be sufficient to waive any conflicting statutory corporate rights. That said, the caveat in the ONSC decision that USA section 3.01 would not have applied to a transfer in kind or asset exchange signals that a direct substantive overlap or conflict is required for a corresponding waiver to apply. As such, should there be a particular statutory right a PE investor wants to ensure is waived, it may be prudent to expressly reference the right. It would also be prudent to specify the scope of scenarios in which a PE investor has a right to act and in respect of which a shareholder right is being waived.
- The ONCA’s brief affirmation underscored the importance of the factual matrix surrounding the USA, namely the intent of giving effect to the father’s will. It also echoed the ONSC’s holding that the conflict between the USA and the OBCA, and the paramountcy of the USA, should be reasonably appreciated by the shareholders at signing. This cautions in favour of being clear, unambiguous and consistent with regards to the full scope of authority intended to be granted to the PE investor. It may also be prudent for the USA to expressly provide that such scope of authority granted to the PE investor is intended to override any conflicting statutory rights of the other shareholders and that the corresponding waiver by such other shareholders applies in all cases.
- The ONSC’s reasoning regarding the paramountcy of the USA over the express reference in the Articles to OBCA dissent rights hinged on the specific wording of the USA’s entire agreement clause and the Court’s understanding that, although dated the same day, the USA must have been entered into after the Articles became effective.[27] It would be prudent to ensure any conflict between a portfolio company’s articles and the authority intended to be granted to a controlling shareholder by a USA is addressed in a more direct way, either by amending the articles or expressly providing the USA prevails over the articles in the event of any conflict.
- The waiver of statutory protections did not render the USA unenforceable in this case, but the Court did not provide guidance on public policy criteria that might justify a decision not to enforce a contractual waiver in other contexts. As such, there may be further litigation in the future relating to enforceability of waivers of statutory corporate law rights.
- Because of the lack of guidance on public policy criteria that might justify not enforcing a contractual waiver and the ONSC’s indication that the facts of this case may limit the applicability of the ruling to other scenarios, prudent drafters of future shareholder agreements can consider not only utilizing waivers but also other drafting techniques to improve the enforceability of their shareholder agreements. Depending on the circumstances, such techniques could include not only waiving the particular provision of the relevant corporate statute but also (1) having the shareholder covenant to vote in favor of the particular action, and (2) should they fail to do so, permitting the corporation to utilize a power of attorney clause to effect such action.
- While this ruling involves an Ontario corporation, caution should be used when attempting to apply these principles to other jurisdictions. For example, had the same set of facts existed for a company incorporated under the British Columbia Business Corporations Act (BCBCA), the outcome may be different. Unlike the OBCA, section 239(1) of the BCBCA restricts the ability of a shareholder to generally waive their dissent rights and only allows shareholders to waive their dissent rights “with respect to a particular corporate action” provided in a separate written waiver. Therefore, a general waiver of the type found at USA section 9.01 in the Husack rulings would likely not have constituted a valid waiver under the BCBCA as it did not apply to a particular corporate action.
