It is commonly understood that minority shareholders have certain protections under the Business Corporations Act.  This includes the right to dissent on a vote to approve certain significant corporate events, such as an amalgamation of the company or the sale of all of its property.  The requirements for such a dissent are in section 185 of the Act.   Provided the shareholder complies with these requirements, they will be entitled to be paid the fair value of the shares they hold and in respect of which they dissent.  Per section 185, this value is to be “determined as of the close of business on the day before the resolution was adopted.” 

But what attributes should be considered when determining the fair value of those shares?

In Bayliss v. Plethora Exploration Corp, the Superior Court of Justice considered this issue in the context of shares that were the subject of an anti-dilution agreement.  The case concerned an application for an order declaring the applicant to own 900,000 common shares in Superior Nickel Inc., a junior mining exploration company. The applicant was a geologist who had won a contest granting him as a prize a 3 per cent stake in a new company that eventually became Superior.  The applicant also signed an anti-dilution agreement in connection with that share issuance.

Applicant Signed Agreement To Allow Shares to be Held in Trust and Voted in the Manner Directed by the Company’s Board

The anti-dilution agreement contained various rights and restrictions.  Notably, it provided that 900,000 common shares issued to the applicant were to be held in trust by a trustee and voted as directed by Superior’s board of directors.  Further, the agreement provided that it would terminate on the amalgamation of the company and contained provisions that would have effectively made the applicant the holder of 3% of the common shares of the company at that time. 

Applicant Purported to Dissent From A Proposed Amalgamation of the Company

In February 2023, the applicant received a document from Superior notifying him that a shareholders meeting would be held to vote on a resolution to approve the amalgamation of Superior with other companies.  The applicant subsequently notified Superior that he wished to dissent from that amalgamation.  The amalgamation was later approved by resolution.

The respondent argued that the applicant had no statutory right to dissent under section 185 of the Act.  That section grants the right to dissent to “a holder of shares … entitled to vote on the resolution.”  The respondent argued the section did not apply to the applicant because the shares in issue were to be held in trust and voted in accordance with the direction of the Board of Directors under the terms of the anti-dilution agreement.  However, in reviewing evidence on the application, including proxy documents and other corporate records, the Court found that the applicant was personally the registered holder of the 900,000 common shares, despite the terms of the anti-dilution agreement.  As such, the applicant had the right to dissent under section 185.

Court Considers Whether Terms of Anti-Dilution Agreement Constituted Attributes of Applicant’s Shares

The issue then became how to determine the fair value of the common shares for purposes of section 185 of the Business Corporations Act.  Specifically, the respondent argued that the “contractual attributes” of the shares set out in the anti-dilution agreement should be considered.  It argued that shareholder rights could be altered by contract and relied upon two particular decisions: McClurg v. Canada and White v. Colliers Macaulay Nicholls Inc.

Presumed That Shares Will Rank Equally With Other Shares of the Same Class

In McClurg, the Supreme Court of Canada referred to the “presumption of equality amongst shares” – the principle that the rights carried by shares of the same class rank equally.  According to the Court, this presumption of equality can be displaced by dividing share capital into different classes.  The respondent in Bayliss argued that this alteration from the presumed “equality of treatment of shareholders” need not be made only through a company’s articles of incorporation but can also be made via contract.

The respondent also referred to the decision of the Ontario Court of Appeal in White.  In that case, the Court noted the common law presumption of equality amongst shares but went further. According to that Court, while shareholders within the same class “are required to be treated proportionately and equally, they do not necessarily have to be dealt with in the same fashion.”  In other words, “different treatment is acceptable, so long as it is justifiable and not disproportionate and unequal.”

Court Finds Rights Attached to Shares of a Given Class Are Required to be Equal in All Respects

While the Court in Bayliss agreed that contractual rights could be altered by contract and that this might result in a shareholder being treated differently than other shareholders, “the rights carried by or attached to, shares of a given class (as opposed to contractual rights of a shareholder) are … required to be equal in all respects.”  In this regard, the Court referred to section 22(3) of the Business Corporations Act, which specifies that where a corporation has only one class of shares (as was the case), “the rights of the holders thereof are equal in all respects.”  The Court thus concluded that the terms set out in the anti-dilution agreement were “not rights or attributes that attach to Superior’s common shares.”  If the terms of the agreement were attached to the applicant’s shares, then “all shareholders within the same class would not be treated equally.”  In other words, another common shareholder who was not subject to the same agreement would be treated differently than the applicant in determining the fair value of their shares.

Respondent’s Arguments Fail In Light of Express Wording of the Business Corporations Act

The essence of the respondent’s argument was that the applicant would receive an “unjustified windfall” if he were permitted a right to dissent despite the terms of the anti-dilution agreement.  The respondent also argued the applicant’s windfall would be even greater if he were allowed to be paid the fair value, not the 3 per cent of the company’s shares dictated by that agreement but instead the 900,000 common shares.  However, the Court effectively found that the company had only itself to blame for this result since it had made the applicant the registered holder of the 900,000 shares instead of following the terms of the anti-dilution agreement.  The applicant’s rights under section 185 flowed from this.

Regarding the argument that the applicant should be paid only the fair value of the 3% of the Superior shares (as opposed to the 900,000 shares), the court noted that the resolution approving the amalgamation had been adopted on March 23, 2023.  Section 185(4) of the Business Corporations Act provides that fair value is to be determined as of the close of business “on the day before the resolution was adopted” (namely, March 22, 2023).  On that date, the applicant had been the owner of 900,000 common shares.  Accordingly, the Court found the fair value of those shares to be determined and paid to the applicant.

Corporations would be well advised to heed the warnings implicit in the Bayliss decision.  First, a company’s records, such as share registers and certificates, proxy forms and correspondence, should be consistent with the terms of contracts it signs respecting shareholdings.  Second, corporations should be careful to structure their share classes and rights in a manner that does not potentially run afoul of the presumption of equality that applies to shares of the same class.  Failing to do so could have significant consequences, particularly if the company believes that the fair value of the holdings of a particular shareholder is to be determined with reference to contractual terms applicable to those shareholdings.

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