The Dissenting Shareholder’s Right of Redemption Under Quebec’s Business Corporations Act

When Québec’s Business Corporations Act¹ (the “QBCA”) came into effect on February 14, 2011, it revolutionized Québec business law in many respects. One of its major innovations was the introduction of a shareholder’s right of redemption.

The right of redemption, which was already available under the federal regime, allows a dissenting shareholder, in certain cases, to insist that the corporation buy back the dissenter’s shares. This mechanism can have significant repercussions, and it is important to take it into account when contemplating operations involving the structure of the corporation.

A shareholder’s right that can have a significant impact on the corporation

The right of redemption is a legislatively created right in favour of shareholders, in most cases minority shareholders. Given the potential consequences for the corporation of the exercise of the right, the conditions that give rise to it and the procedures for exercising it must be strictly respected.

The right is available to a shareholder that votes against any of the following resolutions, which are deemed to represent material changes to the structure of the corporation:

In certain circumstances, non-voting shareholders can also exercise the right of redemption

Holders of shares that do not normally have voting rights also have a right of redemption, but only in the cases described in (iii) to (viii) above. In those cases, the shareholder must vote against the resolution in order to subsequently be able to insist on the redemption of its shares.

If the resolution is not adopted or the measure contemplated by it is not implemented, the right of redemption will not be available.

On the one hand, if the resolution is not adopted, a shareholder who voted against it will have no grounds to insist on the redemption of its shares.

And on the other hand, if the corporation does not implement the contemplated measure despite the resolution having been adopted, the dissenting shareholder will be unable to use this mechanism to force the corporation to repurchase its shares.

The potential impact of the right of redemption on a corporation, particularly a small or medium-sized business with a few key shareholders, can be considerable. And it should be noted that some of the decisions giving rise to the right’s exercise can be termed normal-course operations in the context of corporate reorganizations.

Abstaining from voting will not give rise to the right

The requirement that a vote against a resolution be registered constitutes a notable difference with the analogous federal regime. This requirement allows the corporation to determine the maximum number of shares it may be required to repurchase.

Also, the right of redemption can only be exercised in respect of all of the dissenting shareholder’s shares. In this regard, there are no half-measures.

The corporation must disclose the possibility of exercising the redemption right in the notice of the meeting

A corporation contemplating the adoption of one of the resolutions described above at a meeting of shareholders must state in the notice of the meeting that a right of redemption may be exercised pursuant to the resolution. The corporation must also disclose the existence of such a right to holders of non-voting shares in the event that the resolution could trigger their right to require the corporation to repurchase their shares.

Should the corporation fail to respect the rules regarding the content of the notice of meeting, a dissenting shareholder may require the corporation to purchase its shares within 30 days of learning of the implementation of the measure contemplated by the resolution, and no more than 90 days after such implementation, provided the shareholder voted against the resolution.

After having received proper notice, a dissenting shareholder must inform the corporation, no later than the close of the meeting at which the resolution in question was adopted, of its intention to exercise the right of redemption. For non-voting shareholders, such notice must be given no later than 48 hours before the meeting.

As soon as the corporation implements the measure contemplated by the adopted resolution, it must give a repurchase notice to the dissenting shareholder, specifying the repurchase price and how it was determined.

The redemption price of the shares generally corresponds to their market value the day before the adoption of the contested resolution

The legislature’s decision to use the market value of the shares on the day immediately preceding the adoption of the resolution excludes any potential impact of the measure contemplated by the resolution on the corporation’s share price.

After receiving the repurchase notice, the dissenting shareholder must decide whether to proceed with exercising the right of redemption or waive that right. While the notice of its intent to exercise the right may be a strategic attempt to prevent the implementation of the contemplated measure, the shareholder’s reaction to the repurchase notice is consequential.

Should the shareholder fail to respond to this notice, it will be deemed to have waived its right of redemption. If the shareholder elects to proceed with the exercise of its redemption right, it can then also contest the repurchase price determined by the corporation.

The parties will then have to negotiate a compromise or, if they are unable to do so, a court may ultimately decide the price the corporation must pay.

To date, there is no reported decision where a Québec court has intervened in a matter involving the exercise of a shareholder’s right of redemption.

Payment of the repurchase price is subject to the solvency test

This restriction, which is imposed by the Québec legislature whenever a corporation intends to distribute funds to its shareholders, also applies to payment of the share redemption price.

Thus, the corporation cannot pay the redemption price if it would thereby become unable to meet its short-term liabilities. If it does so nonetheless, the corporation’s directors could be personally liable.

If the solvency test is not met, the corporation will still be required to pay the maximum amount it is able to pay without failing the test. The balance of the repurchase price must be paid as soon as the corporation is able to do so. Whether a major storm or merely a tempest in a teapot begins to brew as the result of an actual or contemplated exercise of the right of redemption, our Business Law team can guide the corporation, coordinate relations between the key players and the corporation, and advise the directors and shareholders throughout the decision-making process surrounding the shareholder’s right of redemption.