Q: I am aware of a number of situations where difficulties have arisen between a father and son over the operation of a family farm. The father is demanding, always wants things done his way and has even verbally threatened the son. The farming operation is incorporated with the father holding 65 percent of the voting shares and the son holding 35 percent.
The mother and daughter-in-law hold non-voting shares. The son has worked on the family farm for years for less than adequate wages. In lieu of better wages, the
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company has acknowledged indebtedness to the son by way of a shareholder’s loan.
The father is threatening to dissolve the company and as majority shareholder take everything. What are the rights of the son in this case?
A: A majority shareholder cannot simply decide to wind up the company without regard to the rights of other shareholders. There are three ways that a corporation can be dissolved: it can voluntarily dissolve; a court can order it to dissolve upon the request of an interested party in certain circumstances; or the director of the government registry office can commence dissolution procedures, usually for non-filing of necessary corporate returns.
The grounds and procedure for dissolution are set out in provincial laws dealing with corporations. When a company is dissolved, assets would be divided among shareholders in accordance to their holdings. But first debts, including money owing to shareholders by way of shareholders’ loans, must be paid.
When a company acts in an oppressive manner or unfairly prejudicial to a minority shareholder’s interest, the shareholder can seek court relief to protect his interest. In Ludlow vs. McMillan, McMillan was a major shareholder in Barmac Industries and also held Ludlow’s interest in trust. He was the company president and its only director.
The company paid McMillan a management fee of $200,000, representing nearly 70 percent of the company’s cash assets.
Ludlow sued, claiming the company had prejudiced his interest. The judge found that this payment was larger than anything the company had ever made and that there was no valid reason for it.
The court ordered that the company be valued as if the payment had not been made and that McMillan buy out Ludlow or that the parties divide assets in a way that was fair to both.
In Alexander vs. Bar SP Ranches Ltd., a father and two sons operated a ranch, with the father holding 50 percent of the shares, and each son 25 percent. Personality conflicts and management disputes plagued the operation. The father and son A decided to sell a significant part of the herd, including breeding stock. The number sold far exceeded past sales. Son B was not made aware of this sale. He sued, claiming that the sale was an oppressive action and a threat to his interest.
The judge agreed and ordered that the father and A had to buy out B’s shares at fair market value. Failing that, he ordered that the company be liquidated and that B be compensated.
If there is a shareholder’s agreement, which I recommend in family corporations, the agreement may also apply in this kind of situation since it will set out rules for resolving disputes between shareholders. Often such an agreement gives one shareholder the right to buy out the other in the event of a dispute.
However, while the law can set out the rights of parties, it cannot make family members get along or like each other.
Don Purich is a former practising lawyer who is now involved in publishing, teaching and writing about legal issues. His columns are intended as general advice only. Individuals are encouraged to seek other opinions and/or personal counsel when dealing with legal matters.
