What the parties often need is a mechanism that fairly allows one party to exit. But even that exit procedure - selling to a third party - is often circumscribed (whether through rights of first refusal, or through the corporation’s consent rights for any transfer). Who in their right mind would talk about walking away from each other and effectively planning for a divorce?Īnd so this is why we so often see shareholders agreements signed in Canada, with no “exit” mechanism, other than to sell shares to third parties (which is often not practicable for private companies). They are about to embark on a new business, to conquer the market and leave competitors in their wake. It is no different with corporations with only a few shareholders, usually consisting of co-founders. It would raise doubts about the union - why is my partner already planning our failing? This is why we see so few prenuptial agreements. It is not in the nature of the relationship, at the time.
The problem of planning for divorce during your engagementįew engaged couples spend much time planning for their divorce. The result is that, until the governments legislate a default exit mechanism for private companies, this type of litigation will usually include allegations of corporate wrongdoing and a parade of horribles against the defendants. And in a minority shareholder situation, such proof is almost invariably required. While deadlock could be enough to get a remedy from the court in an equal shareholder situation, those prospects increase significantly with proof of wrongful conduct. A minority shareholder who wants to exit from a company that has no exit provisions in a shareholders agreement will usually have to show more than that desire to get a remedy from the courts. For companies with few shareholders but where one minority shareholder is complaining about the conduct of the majority, the courts will typically only grant remedies with proof of wrongful conduct by the majority.For companies with equal (50-50) shareholders, remedies have been granted where: (a) there is a lack of confidence and trust between the parties (b) there is a true deadlock on fundamental points between equal shareholders (c) the company was intended to run like a partnership, which is no longer possible given a breakdown in the relationship (d) one of the founders “reasonable expectations” have been defeated and (e) there is major animosity between the parties.The test the courts have applied varies depending on the parties in the private corporations:
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