How does a shareholder buyout work when business partners split up?

When business partners split up and the business is a corporation, one route is a purchase of one partner’s shares, by the remaining partner or by the corporation. Which route applies depends on what the partners signed and on the statute that governs the corporation. This page covers the process. How the price gets paid is covered in using business cash for a partner buyout.

Start with the shareholder agreement

Corporations Canada says shareholder agreements may set rules for the transfer of shares when certain events occur, such as the death, resignation, dismissal, personal bankruptcy or divorce of a shareholder, including notice and how the transfer price will be funded. It also describes a right of first refusal, which requires a shareholder who wants to sell to offer the shares to the other shareholders before selling to an outsider. Agreements may also include dispute resolution mechanisms. Read yours for each of these before doing anything else.

When there is no agreement, or it is silent

Without a buyout clause, a negotiated buyout depends on both sides agreeing on a price and terms; ask your lawyer to set them out in a written share purchase agreement. Corporations Canada says transfers must conform to any conditions or restrictions that apply to the shares, and that directors could have to approve all transfers. Check the articles for that. Consider an independent valuation, so that neither partner is negotiating from a number only the other side trusts.

When talks fail: the court route

Under the Canada Business Corporations Act, a complainant, which includes a registered or beneficial holder of a security, may apply to a court if conduct is oppressive or unfairly prejudicial to, or unfairly disregards the interests of, a security holder, creditor, director or officer. The court may make any order it thinks fit, and the list includes directing the corporation or any other person to purchase a security holder’s securities. Under s.241(6), a corporation cannot make that payment to a shareholder if there are reasonable grounds for believing it is or would be unable to pay its liabilities as they become due, or that the realizable value of its assets would be less than its liabilities. Ontario’s Business Corporations Act has its own provision in s.248, and other provinces and territories have their own acts.

The separate dissent right in s.190 applies only to the corporate actions the section lists, such as selling all or substantially all of the corporation’s property, and only after the shareholder follows the procedure the section sets out, so it is not a general way out of a partnership.