Can a minority shareholder be excluded from earnout or holdback payments?

Earnouts and holdbacks are terms in the sale agreement, not features of corporate statute. The federal Canada Business Corporations Act (CBCA) has no section on them. So a minority shareholder who worries about being left out needs to look first at who is receiving the money, under what contract, and with what rights attached to their shares. Only then does the statute’s fairness remedy come into play.

Who is actually being paid

If the corporation sells its assets, the later payments are owed to the corporation, and shareholders receive value only if the corporation distributes it. CBCA s.24(3) says that where a corporation has only one class of shares, the holders’ rights are equal in all respects, including the rights to vote, to receive any dividend declared and to receive the remaining property on dissolution. If the articles create more than one class, s.24(4) says each class’s rights are set out there. If instead shareholders sell their shares, each seller’s right to an earnout depends on the agreement they signed or joined.

Read the documents

Corporations Canada notes that minority shareholders in a small corporation can negotiate a shareholder agreement that better protects their investment in the corporation. Check whether yours addresses deferred payments, escrow releases and how proceeds are shared. The earn-out glossary entry and the holdback entry explain the two mechanisms. Compare the sale agreement’s payment schedule against the class rights in the articles.

The oppression remedy as a backstop

CBCA s.241(2) lets a court rectify conduct that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, a security holder. Ontario’s equivalent is OBCA s.248. Whether leaving one holder out of later payments meets that wording is a question of fact for a court, and the sections do not mention earnouts.

Questions to ask before closing

• Is the earnout or holdback owed to the corporation or to each selling shareholder?
• Do all share classes share in it, and does the shareholder agreement say how?
• Who decides whether earnout targets were met, and do minority holders get the calculation?
• Does the agreement name the escrow agent and say when held-back money is released?