Can a company buy out a shareholder in Canada?

When owners ask whether a company can buy out a shareholder, they may mean the corporation itself buys the shares, not the other owners. The statutes allow that, with limits. This differs from buying out a business partner, where the other owners pay. Check the Act the company was incorporated under.

The basic power

Section 34(1) of the Canada Business Corporations Act says that, subject to subsection (2) and to its articles, a corporation may purchase or otherwise acquire shares issued by it. Ontario’s Business Corporations Act, section 30(1), uses similar words and also covers warrants, with its exceptions in sections 31 and 32. Alberta’s Act also lets a corporation purchase or otherwise acquire shares it issued. Other provinces have their own statutes.

The solvency limits

Under the federal Act a corporation shall not make a payment to purchase its shares if there are reasonable grounds for believing that it is, or would after the payment be, unable to pay its liabilities as they become due. It also cannot pay if there are reasonable grounds for believing the realizable value of its assets would after the payment be less than the total of its liabilities and the stated capital of all classes. Directors approving the purchase should record how they satisfied themselves on both tests.

Exceptions and redeemable shares

Section 35 of the federal Act allows a purchase despite subsection 34(2) in listed cases, such as settling or compromising a debt or claim, satisfying a shareholder who dissents under section 190, or complying with a court order under section 241. Those cases have their own limits. Redeemable shares fall under section 36, which sets different limits.

After the purchase, and the alternative

Under the federal Act, shares a corporation buys back are cancelled or, if the articles limit the number of authorized shares, may be restored to the status of authorized but unissued shares. A shareholder may also sell to another buyer, who can buy shares from an existing shareholder according to the articles and have the corporation register the transfer.