Is buying a minority share as risky as buying the whole business?

A smaller stake does not mean a smaller set of risks. It trades one set for another. A buyer of the whole business takes control. A minority buyer takes less control and relies more on the corporation’s documents and on the people who hold the rest. This answer uses the Canada Business Corporations Act (CBCA); an Ontario corporation follows the Ontario Business Corporations Act, and other provinces have their own Acts.

Influence is set by votes and by the agreement

Corporations Canada says shareholders exercise most of their influence by passing resolutions at shareholders’ meetings, and that a special resolution needs a larger majority of the votes cast than an ordinary one. Under the CBCA, the directors manage, or supervise the management of, the business and affairs of the corporation, subject to any unanimous shareholder agreement (s.102(1)). Corporations Canada adds that the board has control over management unless a unanimous shareholder agreement transfers the directors’ powers to the shareholders. So check whether you would have a board seat or any powers under such an agreement. Ask for the articles, the by-laws and any shareholder agreement before agreeing a price.

Buying in, and getting out

Corporations Canada notes that transfers must conform to any conditions or restrictions that apply to the shares and their transfer, and that directors could have to approve all transfers. Confirm that your purchase can be registered. A purchaser or transferee of shares subject to a unanimous shareholder agreement is deemed a party to it (s.146(3)). If you were not given notice of it, the Act lets you rescind the purchase no later than 30 days after you become aware of it (s.146(4)). Corporations Canada also notes that shareholder agreements can restrict share transfers and set rules for when a shareholder can or must sell, so read them for limits on your exit.

Information and remedies

A shareholder may examine the corporate records the Act lists (s.21(1)). A complainant may apply to a court under s.241 where conduct is oppressive or unfairly prejudicial to, or unfairly disregards, a security holder’s interests, and the court may order the corporation or another person to purchase that holder’s securities, subject to the corporation’s solvency limit in s.241(6). That is a remedy, not a guarantee of any outcome. Corporations Canada also says most CBCA corporations must keep a register of individuals with significant control; check its ownership test for voting shares and for shares by fair market value to see whether your stake would put you in it.