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Shareholder Disputes – Which Path to Resolution?

5 minute read

Any current or former shareholder, officer, or director of a corporation (a “complainant”) may seek relief under the oppression remedy section of the Ontario Business Corporations Act or the Canada Business Corporations Act where they have been “oppressed” or their interests have been “unfairly prejudiced or disregarded” by the corporation or its directors.

In small, closely-held corporations in particular, these cases usually involve a complaint that a minority shareholder (who is often also a director, officer, and employee) has been unfairly treated by the majority shareholders and/or the directors. The complaints usually involve such issues as:

  • termination of the employment of the complainant;
  • disputes regarding the shotgun/buy-sell clause in the Unanimous Shareholders Agreement;
  • a deadlock which hinders the operations of the company; or
  • share value.

In these cases, the feuding parties usually want to terminate their business relationship without harming the value of company.

There are several options for breaking the deadlock and getting the dispute resolved, each of which has pros and cons. In many cases, arbitration provides the best option because of its flexibility.

1. IN THE COURTS

(a) By action

The Pros:

  • Parties receive the full procedural protections in the court rules – pleadings setting out the facts and allegations of each party, exchange of documents “relevant to any matter in issue” in the dispute, examinations for discovery, trial, and appeal rights;
  • All decisions and orders are public, which may be desirable;
  • Suitable for cases in which there are contentious factual or witness credibility issues;
  • Summary judgment available to fast track a dismissal of the action; and
  • Ontario Superior Court Commercial List – in Toronto, a specialized commercial court can streamline processes and provide case management.

The Cons:

  • Delay – actions invariably take longer than either applications or arbitrations because there are often more steps in the process and court availability affects when motions and trials are heard;
  • No choice of decision-maker – the court appoints the judge(s) who will hear the case;
  • Cost – if there are more procedural steps, an action may be more costly; and
  • In most cases, the successful party will be awarded its costs on a more limited basis than is the case in arbitrations.

(b) By application

The Pros:

  • Speed – there are fewer steps and no trial – a judge makes a decision based upon witness affidavits attaching relevant documents, transcripts of cross-examinations (if any), and written and oral submissions of lawyers and without a trial; and
  • Cost – the case moves more quickly and with fewer steps. While it is more costly up front, it is usually less costly overall.

The Cons:

  • May not be appropriate where there are contentious facts and/or credibility issues that require a judge to see witnesses testify in person;
  • Court may convert the application to an action or order a trial on limited issues if credibility or contentious issues arise;
  • No pleadings – complainant must lay out entire case in an affidavit before knowing position of respondents; and
  • More limited document production – only documents attached to affidavits or disclosed as a result of cross-examinations will be produced.

2. BY PRIVATE ARBITRATION

The Pros:

  • Speed – most arbitrations can be completed more quickly than a court action;
  • Choice of decision-maker – parties choose their arbitrator;
  • Confidentiality – because arbitration is private, it is desirable when there are business reputation or trade secret issues at stake;
  • Active case management by the arbitrator – the arbitrator comes to know the case well and can make decisions quickly;
  • A successful party can recover a greater amount of its legal costs – arbitrators can award a party recovery of its “reasonable” legal costs;
  • Flexibility in procedure – can be customized to the dispute and, in some cases, may be decided entirely in writing, or the hearing can be bifurcated (damages issues considered only if liability found);
  • Mediation-arbitration available – the arbitrator may also act as mediator of the dispute; and
  • Finality – usually more limited rights of appeal.

The Cons:

  • Only parties who have consented to arbitration will be bound by any award of the arbitrator;
  • If no arbitration clause exists, it is usually difficult to get feuding parties to agree to arbitration after a dispute has arisen;
  • The arbitrator may not be able to order all of the remedies a judge may order – for example, orders affecting or binding third parties not involved in the arbitration;
  • Cost – parties must pay the fees and expenses of the arbitrator and to rent the place of the hearing;
  • Enforcement – although the award of an arbitrator is legally binding, it may be necessary to go to the courts to enforce it if a party does not comply; and
  • Preliminary issues often arise – if there is a challenge to the arbitration clause, the arbitrator may need to decide jurisdiction, process, and validity of the arbitration clause before getting to the heart of the dispute.

3. BY MEDIATION

Mediation is a voluntary process by which the parties to a dispute meet with a professional facilitator, known as a mediator, who tries to help them reach an agreement to resolve their dispute.

Parties to court proceedings and arbitrations can, at any stage, agree to participate in a mediation. Most parties want an opportunity at some stage of the proceeding to meet to try to settle their dispute and avoid the costs of a trial/hearing, which is actively encouraged by most judges and arbitrators.

In fact, the vast majority of cases do settle before trial or a hearing. Therefore, mediation should be considered in every case.

CONCLUSION

Every dispute is different and each of these options should be weighed, along with the unique facts of the case and the parties’ ultimate objectives. Those may be continuation of an ongoing business or personal relationship, speed, efficiency, cost, or simply “having their day in court”. A trusted legal advisor can help a client decide upon the best course of action to put the dispute behind them and get on with business.

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Lisa C. Munro, Q.Arb

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