Enforceability Considerations For Shareholders' Agreements: Tips For The Best Shot[gun] At Success

• Published date: 24 February 2025
• Law Firm: Alexander Holburn Beaudin + Lang LLP
• Author: Steffi Boyce

What happens when, in a closely-held company of three or more shareholders, the working relationship between two of the shareholders (only), has eroded so irreparably that the dysfunction has stymied the company's business? Is it possible to include enforceable selective remedies in shareholders' agreements that offer a path forward without neutral, non-disputing shareholders having to choose sides? i.e. this dispute is between the two of us, and one of us has to go.

We recently considered this issue and whether buy-sell shotgun provisions that operate between specific shareholders to the exclusion of others are enforceable. For the purposes of this discussion, such provisions will be referred to as "selective shotgun" provisions or clauses. The question uncovered an interesting change in the drafting of shotgun provisions over the past three decades.

Drafting Trends

In the 1990s, model shareholders' agreements tended to provide for selective shotgun clauses as part of their "standard" wording. The wording allowed a shareholder to trigger a shotgun clause against a single other shareholder without requiring that offers be made to the shareholders at large. Current model forms have eliminated the concept without commentary.

Model wording (1990s): "any one or more Shareholders (an "Offeror") may make an offer to any one or more of the other Shareholders (an "Offeree") [... – shotgun provisions continue]"

Model wording (current): "any one or more Shareholders (the "Offerors") may make an offer to the other Shareholders (the "Offerees") [... – shotgun provisions continue]"

Although the Business Corporations Act (British Columbia), SBC 2002, c57 (the "BCBCA") came into force in 2004, the timing appears to be more coincidental than influential, for reasons that will become clear in this discussion.¹

Judicial Treatment and Standards

The change in drafting trends appears to be a result of a general shift in oppression jurisprudence over time. The oppression remedy under the BCBCA (section 227) includes grounds for relief from conduct that is "unfairly prejudicial" or "oppressive". The term "unfairly prejudicial" was first incorporated into the statutory remedy under the British Columbia Companies Act, SBC 1973, c18. Prior to 1973, the only statutory ground for relief was oppression. British Columbia's courts have since moved from the application of a subjective standard of review requiring an element of bad faith on the part of the respondent ("oppression"), toward a more objective equity-based test that considers the fairness of the result ("unfair prejudice"). They have now clearly established a distinction between "oppression" and "unfair prejudice", with the latter including equitable considerations. Therefore, British Columbia's courts have recognized the requirement to evaluate not just narrow questions of breach (of the BCBCA, the company's articles, or contractual agreements), but also wider questions of fairness and the effect of the impugned conduct on the injured shareholder.² In addition, a standard of "unfair prejudice" does not require that malice or intent be established, as required with a standard of "oppression".³

The apparent recommendation to draft modern shotgun provisions in a way that requires shotgun offers to be made to all of the other shareholders appears to be a response to more "equitable" analyses by courts over the past few decades. The trend seems to recognize equitable risks associated with cutting shareholders out of buy-sell shotgun offers, particularly where it could result in a new majority shareholder or disparities in the value of shareholdings (due to possible minority discounts).

Recently in BC,⁴ and in Canada more broadly following the Supreme Court of Canada decision in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69,⁵ a new standard focused on the "reasonable expectations" of shareholders has emerged as the starting point for the court's consideration of any oppression application. The concept is again, one of equity, however in the specific...