Dissent Rights and Shareholder Agreements – New Ruling Provides Guidance

Dissent rights, entrenched in most provincial corporate statutes, grant shareholders the power to contest significant corporate changes and compel the corporation to repurchase their shares at a fair market value. Central to the enforcement of these rights is the statutory framework, which can result in either an amicable valuation agreement or a court-mandated determination of share value.

In Husack v. Husack, 2024 ONCA 117, the Court of Appeal considered the ability of parties to a shareholders agreement to set contractual limits to these rights. The court’s decision confirmed that shareholders, through unanimous shareholders agreements (“USAs”), could, where not otherwise void for public policy reasons, effectively renounce their dissent rights even when such rights are not expressly waived in the agreement.  This principle was uncertain prior to this ruling.

At the heart of Husack was an estate dispute involving Frank Husack Holdings Inc. (“FHH”), a family-run holding company with diversified interests in property and real estate development.  Frank Husack (“Frank”) died in 2008.  FHH was by formed by articles of amalgamation (the “Articles”) after his death as a vehicle to hold and administer the remaining assets of his estate.

Evelyn Husack (“Evelyn”), was the spouse of Frank and is the mother of the Donna Husack (“Donna”), Donald Husack (“Donald”), Dianne Parr and Doreen Wills (“Dianne and Doreen”). The four Husack children, Donna, Donald, Dianne and Doreen, each own 25% of the non-voting common shares of FHH.  Evelyn and Donald are the sole officers and directors of FHH.

The shareholdings were distributed Frank’s children from a family trust in 2006, prior to Frank’s death, but were understood to comprise their inheritances.  The share transfer to the children was made as part of the planning for Frank’s Estate (the “Estate”). The Estate continues to own all of the voting shares in FHH.  Evelyn and her four children are also joint trustees of the Estate.  Pursuant to Frank’s will, the Estate operates on a “majority rules” basis, but Evelyn has effective veto power over all decisions made by the Estate.

In 2010, the four siblings and Evelyn, as estate trustee, entered into a USA to govern all affairs of FHH.  The USA was signed by all four siblings as non-voting common shareholders, and by Evelyn on behalf of the Estate and FHH.  Evelyn is defined as “the Estate” in the USA.

The USA includes critical clauses regarding the assets of the company and the shareholders’ rights under the Ontario Business Corporations Act (the “OBCA”).

Section 9.01 of the USA contained a waiver of rights under applicable legislation when it conflicted with the agreement.  The provision stated that:

“It is the intent of the parties that such provisions of The Business Corporations Act or any successor legislation granting rights to shareholders, which may be in conflict with the provisions of this Agreement, are hereby waived, and the provisions hereof shall govern their dealings among themselves (to the extent allowed by law).”

Section 3.01 of the USA stated that Evelyn, as the “Estate” had the right to cause FHH to liquidate all of the assets of the corporation as she deemed fit, it her “sole and exclusive discretion”.

Section 5.01 of the USA stated that the shareholders covenanted and agreed to vote and to act “as to give full effect to the purpose and intent of [the USA]” and that FHH also agreed “to carry out the terms of [the USA] to the full extent that [FHH] has the power and capacity at law to do so.”

In 2019, the estate trustees (with Evelyn in the majority) voted to direct a sale of all assets and a wind-up of FHH.  Donna (and only Donna) voted against the proposal.  This prompted Donna to assert her dissent rights, as a shareholder, under the Articles and the OBCA. In response, the other parties argued that the USA precluded such dissent rights. Donna then brought a court application to enforce her alleged dissent rights.

The application judge evaluated the OBCA’s applicability to the situation. It was held that the sale of FHH’s assets was substantial enough to activate the statutory dissent rights. Nevertheless, the application judge found that the waiver provisions in USA unequivocally waived these rights. The language in the clauses was interpreted as sufficiently unambiguous, effectively superseding the OBCA’s provisions and aligning with the intent of the USA to prioritize its stipulations over any conflicting statutory rights.  The application judge also determined that allowing shareholders to waive these rights was not void on the basis of public policy.

The application judge also noted that if Donna’s position were to be accepted, it would mean that the approval of a sale of FHH’s assets would be effective only when all of the shareholders have approved the sale by a special resolution.  The application judge stated that “this is directly contrary to Section 3.01, which provides that the Estate can decide to sell in its sole discretion, and would render Section 3.01 meaningless.”

This interpretation affirmed the rights of shareholders to contract out of statutory dissent rights, even when such rights are not explicitly waived in the shareholders agreement.  This concept that had not been previously articulated. The Ontario Court of Appeal recently upheld the ruling.

This ruling serves to confirm the enforceability of unanimous shareholders agreements that waive statutory shareholder protections, including dissent rights, where there is no overriding public policy reason to preclude such waiver.  This holds true even if the rights themselves are not expressly waived in the agreement.  Although the applicability and far-reaching effects of this decision remain to be seen, it stands as an essential reference point for shareholders engaged in similar unanimous agreements, emphasizing the ability to waive statutory rights even in cases where they are not explicitly mentioned within the agreement.

Dickinson Wright lawyer Daniel Waldman secured a critical court victory for his client in this landmark ruling from the Ontario Court of Appeal, which clarified the complexities surrounding shareholders’ dissent rights in corporate transactions.

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About the Authors:

Daniel Waldman is Of Counsel in the firm’s Toronto office. He has a broad commercial litigation practice with an emphasis on real property litigation, including commercial leasing, commercial real estate, construction law, and debt collection. Daniel can be reached at 416-644-2838 or dwaldman@dickinsonwright.com. To read his full bio, please click here.

Andre Poles is a Partner in Dickinson Wright’s Toronto office. He has spent over 20 years advising clients in the financial services industry, focusing his practice on corporate finance for public and private companies. He can be reached at 416-777-4037 or APoles@dickinsonwright.com and you can visit his bio here.