January 4, 2020 | By Julius Melnitzer
If there’s doubt in anyone’s mind about the superior protection shareholders’ agreements provide for aggrieved investors, the Ontario Superior Court’s decision in Murray v. Pier 21 makes the case in spades.
“We frequently get pushback from clients who say that they have perfect relationships with the other shareholders, and that they’ll think about a shareholders’ agreement when and if the time comes,” says Charlie Kim, a corporate-commercial lawyer who focuses on private companies at Robins Appleby LLP in Toronto. “But if relationships go off the rails, it’s important to have something that will evidence their intentions when things were going right.”
To be sure, provincial and federal corporate legislation does provide remedies against oppressive behaviour that disadvantages minority shareholders.
“The legislative protection, however, focuses on whether a party’s reasonable expectations were breached,” Kim says. “And a shareholders agreement can be important in determining what these expectations were.”
Murray is a case in point – a stark example of just how expensive the absence of a shareholder’s agreement can be.
David Star was the dominant shareholder in Pier 21 Asset Management Inc. Emily Murray was a minority shareholder. Murray successfully sued Star for oppression. Justice Michael Penny ordered Star and Pier 21 to purchase Murray’s shares at a fair value of $39.3 million.
The problem was that the structure of the share purchase affected Murray’s tax liability. Three basic structures were available: Option 1 saw Star or his holding company purchasing the shares of Murray’s holding company; Option 2 had Pier 21 repurchasing its shares for cancellation, and; Option 3 saw Star or his holding company buying the Pier 21 shares from Murray’s holding company.
Murray’s tax liability was $768,468, $849,419, and $1,099, 703, respectively. Naturally, she urged the court to adopt Option 1, as it was tax beneficial to her and tax neutral to Star. Doing so, she maintained, “would preserve the integrity of the original tax planning”.
Star preferred Option 2. Buying Murray’s holding company under Option 1, his lawyer argued, might expose Star to undetermined liabilities arising from other securities transactions in which the holding company participated.
Penny sided with Star, and ordered that Option 2 govern the transaction. The “best evidence” of Murray’s reasonable expectations concerning the purchaser of her shares in Pier 21, he reasoned, could be found in a previous transaction in which she took advantage of the holding company structure to sell a portion of her shares to Star.
“Ms. Murray took the benefit of a holding company structure,” Penny observed. “To the extent the structure must now be unwound to effect the ordered repurchase, at fair value, of the remainder of her shares, it is not unreasonable that she should also bear the concomitant burden.”
Besides, there was no evidence that Murray had a reasonable expectation of preserving “the integrity of the original tax planning” were she to sell her shares. Similarly, there was no evidence of her reasonable expectation of a transaction structure that would minimize Murray’s tax liability to the exclusion of other considerations.
The result, which cost Murray more than $80,000, could well have been different if a shareholder’s agreement had shed some light on the parties’ intention regarding disposal of the shares.
“What often flies under the radar is that there are many ways to go from A to B when issues arise between shareholders,” says Amanda Laren, a tax and estates lawyer at Robins Appleby who focuses on family-owned and closely-held businesses. “Otherwise, the parties may have to live, as they did in this case, with what the court decides.”
The upshot is that shareholders should be aware of the protections that a shareholders’ agreement provides in the event of a buy-out.
“And that’s true whether the buy-out occurs in the context of normal business dealings or of a court-ordered buy-out as a remedy for oppression,” Kim says.
Julius Melnitzer is a Toronto-based legal and financial affairs journalist, ghostwriter, writing coach and media trainer. Readers can reach him at [email protected] or at https://legalwriter.net/contact.