The Share Buyback Denial: What If Your Company Says No?

When can a company legally refuse a share buyback?

The starting point is that share ownership does not automatically come with a right to force the company to repurchase your shares. If there is no contractual or statutory obligation to buy back shares, the corporation has the discretion to refuse. There are also statutory restrictions: under both the Ontario Business Corporations Act (OBCA) and the Canada Business Corporations Act (CBCA), a corporation cannot repurchase its own shares if doing so would render it unable to pay its liabilities as they come due, or if the realizable value of the corporation's assets would fall below its liabilities after the repurchase. Similar solvency restrictions apply under BC's Business Corporations Act (BCBCA).

Outside of these solvency restrictions, however, a refusal is not automatically lawful. The key question is whether any of the following three sources of obligation apply to your situation.

1. Your shareholder agreement requires a buyback

In most closely held private companies in Ontario and BC, the shareholder agreement is the primary document governing what happens when a shareholder wants to exit. A well-drafted agreement will typically address buybacks through one or more of the following mechanisms:

• Mandatory repurchase clauses: Provisions requiring the corporation or remaining shareholders to buy out a departing shareholder upon certain triggering events such as resignation, retirement, termination of employment, disability, or death.
• Right of first refusal: A requirement that a shareholder who wants to sell must first offer their shares to the other shareholders or the corporation before selling to a third party.
• Shotgun (buy-sell) clauses: A mechanism allowing one shareholder to name a price at which the other must either buy or sell, designed to resolve deadlocked relationships efficiently.
• Drag-along and tag-along rights: Provisions that govern what happens when a majority shareholder wants to sell to a third party.
• Valuation procedures: Formulas or processes for determining the price at which shares must be bought or sold.

If your shareholder agreement requires the corporation or the other shareholders to purchase your shares and they refuse, that refusal is a breach of contract. You are entitled to seek specific performance (an order compelling the purchase) or damages.

2. You have exercised dissent rights

Dissent rights are a statutory protection that allow a shareholder to object to certain fundamental changes to the corporation and demand payment of the fair value of their shares. They exist to protect shareholders who did not vote in favour of a major transaction from being forced to remain in a company that has fundamentally changed without their consent.

Under the OBCA (sections 185), dissent rights arise when shareholders vote on:

• An amalgamation with another corporation
• A continuance under the laws of another jurisdiction
• A sale, lease, or exchange of all or substantially all of the corporation's assets outside the ordinary course of business
• Certain amendments to the articles that affect the shareholder's shares
• A court-approved arrangement where the court orders dissent rights to apply

The CBCA and BC's BCBCA contain equivalent provisions. If you validly exercise dissent rights and the corporation refuses to pay fair value, you can apply to court for a determination of fair value. The corporation cannot simply ignore a properly exercised dissent right.

3. The refusal constitutes shareholder oppression

The oppression remedy under section 248 of the OBCA and section 241 of the CBCA is one of the most powerful tools available to minority shareholders in Canada. It allows a court to intervene where the corporation or its majority shareholders have acted in a way that is oppressive or unfairly prejudicial to, or that unfairly disregards the interests of, any security holder.

Courts have consistently held that minority shareholders in private companies have a reasonable expectation that they will be able to exit the company on fair terms, particularly where they have also been employees or active participants in the business. When the majority shareholders use their control to block a minority shareholder's exit, strip value from the company, or otherwise act in a way that defeats those reasonable expectations, the courts will intervene.

Conduct that courts have found to constitute oppression in the share buyback context includes:

• Refusing to buy back shares to force a minority shareholder to accept a below-market price
• Manipulating the corporation's finances to depress share value before a forced buyout
• Excluding a minority shareholder from management without buying out their shares
• Redirecting corporate revenues to majority-controlled entities to reduce the value of minority shares
• Using corporate funds to pay majority shareholders' personal expenses while refusing to distribute to the minority
• Terminating a shareholder-employee's employment as a tactic to force a below-value share sale

Share buyback rights in British Columbia

BC shareholders are governed by the Business Corporations Act (BCBCA) rather than the OBCA. The framework is broadly similar but with some important differences.

Under the BCBCA, a corporation is prohibited from purchasing its own shares if the purchase would result in the company being unable to pay its liabilities as they fall due, or if the fair value of the company's assets would be less than its liabilities and stated capital after the repurchase. These solvency restrictions mirror those in the OBCA and CBCA.

Dissent rights under the BCBCA (Part 8, Division 2) apply to fundamental changes including amalgamations, continuances, and dispositions of all or substantially all of the company's undertaking. The procedural requirements are similar to those under the OBCA, with strict notice and deadline requirements that must be followed precisely.

The oppression remedy under section 227 of the BCBCA is equivalent in scope and effect to the remedy under the OBCA and CBCA. BC courts have the same broad remedial powers, including ordering a corporation to purchase a shareholder's shares at fair value. BC courts have applied the same general principles developed in Ontario and federal oppression case law, making the analysis substantially consistent across both provinces.

For BC shareholders, the most important differences from Ontario practice are typically procedural: filing deadlines, court processes, and the specific notice requirements for dissent rights. If you are a BC shareholder, ensure you are working with a lawyer familiar with BC corporate law and BC Supreme Court procedure.

How is fair value determined in a share buyback dispute?

Whether the buyback obligation arises from a shareholder agreement, dissent rights, or an oppression order, the price to be paid is almost always contested. The standard in Canadian law for court-ordered buybacks is fair value, which is distinct from fair market value in an important respect: fair value does not apply a minority discount.

In a voluntary sale on the open market, a minority stake in a private company would typically be discounted to reflect the fact that a minority shareholder has limited control over the business. Courts ordering buybacks under the oppression remedy or dissent rights provisions reject this discount. The minority shareholder is entitled to their proportionate share of the total enterprise value, as if the entire company were being sold.

Courts typically determine fair value through one or more of the following methods:

• Income approach: Valuing the company based on its expected future earnings or cash flows, discounted to present value
• Asset approach: Valuing the company based on the net value of its assets and liabilities
• Market approach: Comparing the company to similar businesses that have recently been sold

In contested cases, each side typically retains a qualified business valuator to provide an expert opinion. The court weighs the competing valuations and may adopt one, the other, or a figure between them. Retaining an experienced valuator and a lawyer who understands how to present valuation evidence effectively is critical to the outcome.

Steps to take if your share buyback has been refused

Step 1: Review your shareholder agreement immediately

Your shareholder agreement is the first document to examine. Look for mandatory buyback or repurchase clauses, triggering events, valuation formulas, notice requirements, dispute resolution provisions, and any deadlines you may be subject to. Missing a contractual deadline can cost you your rights under the agreement even if the underlying obligation was valid.

Step 2: Identify the applicable statute

Determine whether your corporation is incorporated under the OBCA, CBCA, or BCBCA. This affects which dissent rights provisions and oppression remedy sections apply, as well as the procedural rules for any court application. Federal corporations (incorporated under the CBCA) can operate in any province, so do not assume your Ontario or BC corporation is incorporated provincially.

Step 3: Get legal advice before taking any action

Share buyback disputes involve corporate law, contract law, valuation, and litigation strategy simultaneously. The wrong step at an early stage, such as continuing to accept distributions, participating in shareholder votes, or making statements that could be construed as accepting the company's position, can weaken or eliminate your legal rights. Get advice before you act.

Step 4: Send a formal demand letter

A demand letter from a lawyer serves several purposes: it puts the corporation on formal notice of your position and the legal basis for it, it triggers any contractual timelines in the shareholder agreement, it creates a record that you asserted your rights promptly (which matters for limitation periods and oppression claims), and it often prompts a negotiated resolution without the need for court proceedings.

Step 5: Consider alternative dispute resolution

Many shareholder agreements require mediation or arbitration before court proceedings can be commenced. Even where not required, mediation of a share buyback dispute can produce a faster and more cost-effective resolution than litigation, particularly where the primary dispute is over valuation rather than the existence of the obligation itself. A jointly appointed valuator can sometimes resolve the valuation dispute without court intervention.

Step 6: Commence court proceedings if necessary

If the refusal persists and alternative dispute resolution has failed or is not available, court proceedings may be necessary. Depending on the basis of your claim, this may involve an application for an oppression remedy, a dissent rights application, or a breach of contract claim seeking specific performance or damages. In urgent cases where value is being stripped from the corporation, interim injunctive relief may also be available.

What courts can order in a share buyback dispute

Ontario and BC courts have broad powers to remedy share buyback disputes. Depending on the basis of the claim, a court can:

• Order the corporation to purchase the shareholder's shares at fair value (the most common remedy in oppression and dissent rights cases)
• Order specific performance of a buyback obligation in a shareholder agreement
• Award damages for the loss suffered as a result of the refusal
• Appoint an independent valuator to determine fair value
• Restrain the corporation from taking steps that would further diminish the value of the minority shareholder's shares
• Order the winding up of the corporation in extreme cases where the relationship has irretrievably broken down
• Award costs against the party whose conduct was unreasonable or in bad faith

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