What in-house counsel need to know about shareholder dissent rights

• to dissent from significant corporate transactions or fundamental corporate changes  
• to require the corporation to repurchase their shares for their “payout value” based on their fair market value

Dissent rights are also commonly given to registered shareholders by agreement or court order in plan of arrangement transactions. The legal theory behind dissent rights is that some transactions significantly change the fundamental nature of the company. As such, the shareholders should have the option of exiting the corporation and liquidating their investment.

As a statutory right, the legal basis for dissent rights is found in the Canada Business Corporations Act (CBCA) and other corporate laws of provinces and territories.

Here’s a short clip of how appraisal rights or dissent rights can happen in the context of mergers and acquisitions:

If you’re looking for a lawyer to help you determine your dissent rights, check out our Special Report on the Top Corporate Law Firms in Canada.

Statutes providing for dissent rights

Corporations that are formed under the CBCA will follow its procedures of exercising dissent rights, including its limitations. Corporations formed under provincial and territorial corporate laws are regulated by those same laws. In other words, the corporation is governed by the law under which it was incorporated, including its dissent rights.

Some examples of these provincial and territorial corporate laws that provide for dissent rights are:

• Ontario: Section 185 of its Business Corporations Act provides for the rights of dissenting shareholders
• Québec: Chapter XV of Business Corporations Act details the dissent rights of shareholders in the context of take-over bids
• British Columbia: Division 2, Part 8 of Business Corporations Act provides for the dissent proceedings and the shareholders’ right to dissent
• Alberta: Section 191 under Part 14 outlines the shareholder’s right to dissent in case of fundamental changes
• Manitoba: Section 184 of The Corporations Act, under Part XIV – Fundamental Changes, provides for the shareholder’s right to dissent

There’s not too much distinction between the CBCA and these provincial laws when it comes to the rights of dissenting shareholders, save for some instances. For example, most provincial corporate laws allow the exercise of dissent rights in cases of fundamental changes in the corporation. However, shareholders are still advised to refer back to their law of incorporation when figuring out how to exercise their dissent rights.

How can shareholders exercise their dissent rights?

The process of exercising dissent rights is a major consideration not only for the dissenting shareholders, but also for the corporate lawyer or corporate in-house counsel. In addition to what common law has provided, the CBCA outlines the valid exercise of dissent or appraisal rights.

Fundamental and significant changes to trigger dissent rights

The CBCA provides for the list of instances where a holder of shares of any class may exercise their dissenting rights. It’s when the corporation:

• has become subject to a court order for the approval of a proposed arrangement to effect a fundamental change
• amends its articles of incorporation to –
  • restrict the issuance, transfer, or ownership of the class of shares
  • restrict the business or businesses that the corporation may carry on
  • increase or decrease the maximum numbers of authorized shares
  • exchange, reclassify, create, or cancel a class of shares
  • alter, increase, or remove the rights, privileges, restrictions, or conditions of a class of shares
• amalgamates, other than a vertical or horizontal short-form amalgamation under the CBCA
• continues –
  • under the law of another jurisdiction or
  • under the Bank Act, the Canada Cooperatives Act, the Cooperative Credit Associations Act, the Insurance Companies Act, or the Trust and Loan Companies Act
• sells, leases, or exchanges all, or substantially all, of its properties, whose purpose is outside the corporation’s ordinary course of business
• carries out a going-private transaction (i.e., when a public company is converted into a private company)
• carries out a squeeze-out transaction (i.e., when the majority shareholders of a non-distributing corporation remove its minority shareholders)

Process of exercising dissent rights

Before the dissenting shareholders are paid their shares by the company, there must be a valid exercise of their appraisal or dissent rights. Aside from the correct application of the triggering events or fundamental changes, the process for its exercise must also be observed.

As for the CBCA, here’s the process for the valid exercise of the right of dissenting shareholders:

1. Notice of the meeting: when a meeting is called, whose purpose is any of the grounds for the dissent rights, its notice must state that a dissenting shareholder is entitled to be paid the fair value of their shares should they disagree to its resolution
2. Objection to the resolution: the dissenting shareholder will send a written objection during or before the shareholders’ meeting where the resolution on the fundamental and significant changes will be voted on; except when the corporation has not released a notice
3. Notice of the resolution: after the shareholders’ meeting, the corporation will then send a notice of the resolution to the dissenting shareholders, stating that the resolution has been adopted
4. Demand for payment: after receiving the notice of the resolution, the dissenting shareholder will send to the corporation a demand for payment of their shares at fair value
5. Return of the share certificate: the dissenting shareholder must also send the share certificates, which is the subject of the shareholders’ dissent rights, back to the corporation
6. Payment of shares: the dissenting shareholder will be paid after it has accepted an offer to pay, which the corporation is required to send to the dissenting shareholders on the date of effectivity of the resolution, or when the corporation received the shareholders’ demand for payment

This 2020 article on Bamrah v. Waterton Precious Metals Bid tells the story of how a shareholder exercised his dissent rights following a company takeover.  

Payment of shares of the dissenting shareholders

Moving past the disagreement over the fundamental change that the corporation wants, another contention that may arise is the payment of shares of the dissenting shareholders. The dissenters and the remaining shareholders can go back to what the law says to resolve this issue.

The CBCA says that a valid exercise of the dissent rights will entitle the shareholders to a “fair value of the shares.” Its value is determined on the day before the triggering event takes effect (i.e., resolution was adopted, or the court order was made).

Limitation to payment of shares in dissent rights

The CBCA limits the payment of shares to the dissenting shareholders. It says that the corporation shall not make a payment to a dissenting shareholder if it has reasonable grounds to believe that:

• it would be unable to pay its liabilities after paying the dissenting shareholders; or
• the value of its assets would be lesser than the aggregate of its liabilities

What are important common law principles on dissent rights?

There are two important decisions on appraisal or dissent rights which are useful information for in-house counsel:

• Matre et al v. Crew Gold Corporation
• Nixon v. Trace

Dissent rights that apply to beneficial shareholders

The first of these two cases is Matre et al v. Crew Gold Corporation, 2011 YKSC 75. In this case, the Supreme Court of Yukon extended the dissent rights in a plan of arrangement to beneficial shareholders.

A background on the case: Crew Gold was pursuing a business combination through an arrangement that gave registered shareholders dissent rights. Several individual shareholders, believing they were registered, delivered dissent notices. However, they were only beneficial shareholders, their shares being registered in the name of an intermediary bank. The company therefore rejected their notices.

The court held that the company’s management owed a duty of fairness to the dissenters. It held that the company itself had largely caused the shareholders’ confusion about their status. It ordered that shareholders have the right to dissent, even if they were not registered.

Factors for the court’s decision against Crew Gold

Here are some of the factors that led the court to the conclusion that the company is at fault in this case:

• No distinction on shareholders: The company had posted on its web site a list of its 50 largest shareholders, including two of the dissenters. The list did not distinguish between registered and beneficial shareholders.
• No information on becoming registered: The company’s information circular about the arrangement was clear that only registered shareholders could dissent. However, it said “nothing meaningful” about how beneficial shareholders could become registered and how to exercise their dissent rights.
• Lapse of in-house counsel: One of the dissenters had contacted the company’s counsel and asked whether his dissent notice was valid. He was told that the counsel could not advise him about that. He was also not told that he was not a registered shareholder.

An exceptional case and its effects for in-house counsel

The court acknowledged that this was an exceptional case. However, in-house counsel should take care not to repeat Crew Gold’s mistakes, and so lose control over which shareholders can dissent from transactions.

Here are some ways that lawyers can learn from this case:

• ensure that publicly available information about their company clearly distinguishes between registered and beneficial shareholders
• consider including in information circulars for transactions giving rise to dissent rights –
  • information about how beneficial shareholders can become registered to exercise dissent rights
  • information about who they should contact
• should not (in the words of the court) “evade” the issue if they are contacted by beneficial shareholders, while being careful about giving legal advice to them
• when asked, at least inform the shareholder whether they appear as a registered shareholder on the company’s central securities register
• should, at least, tell the shareholder who to contact for advice about how to become a registered shareholder

More resources for corporate in-house legal counsel in relation to shareholders’ dissent rights are found on our Corporate Commercial page.

How to value the shares of dissenting shareholders

Another important case is Nixon v. Trace, 2012 BCCA 48. Here, the British Columbia Court of Appeal considered how to value the shares of shareholders who had dissented from a transaction. The transaction in question is the company’s sale of nearly all of its assets.

The parties could not agree on the fair market value of the dissenters’ shares, so that was determined by the court. As a result of tax considerations, the dissenters argued the fair market value of their shares should be “grossed up.” This is to compensate for the tax they would have to pay on the amounts they received.

However, the Court of Appeal rejected that argument. It clearly stated that the issue was simply the en bloc value of the dissenters’ shares. The tax consequences of the shareholders exercising their dissent rights were irrelevant to that determination.

Lessons for corporate lawyers from the Nixon case

Important business considerations in deciding whether to proceed with the transaction are:

• whether shareholders are likely to dissent from a transaction
• what the fair market value of any dissenters’ shares might be

When shareholders do dissent, the situation is often resolved by negotiation of an agreed payout value for their shares. This decision is useful for in-house counsel in estimating the likely “dissent cost” of a transaction. It will also be helpful in such negotiations, making it clear that the dissenters’ tax consequences are their own concern, not the company’s. This is why it should not be a legitimate factor in the negotiations during dissent rights.

Shareholders can be entitled to dissent from corporate transactions in various situations. These two decisions highlight the following important factors to determine whether and how to proceed with transactions giving rise to dissent rights:

• controlling which shareholders are entitled to dissent
• estimating and negotiating the fair market value of the dissenters’ shares
• controlling the cost of those dissent rights to their company

Dissent rights in Canada are a vital right of shareholders

Dissent rights are simply the dissenting shareholders’ way out of the company when they disagree with certain decisions of the corporation. When allowed by the law, the corporation must pay (or return) the dissenters’ shares at fair market value. Along with these lines are specific factors that both parties — the corporation and the dissenters — must consider. To help alleviate an already hostile situation, the roles of corporate lawyers and in-house counsel are important to shed light on the issue.

Do you know of recent cases where shareholders exercised their dissent rights? Let us know in the comments.