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OP I N ION BY CHERYL SATIN BANKING ON CORPORATE All shareholders should have dissent rights directors, as managers of the company. Primarily, directors are empowered to F manage and make all decisions relating to the corporation's business. In doing so, they are to act on an informed basis, in good faith, and in an honest belief the actions taken are in the company's best interest. However, shareholders retain the power to make decisions on fundamen- tal corporate changes like amalgamations and sales of a corporation's assets out of the ordinary course of business (known as an "extraordinary sale"). Shareholder voting rights are preserved here on the understanding that such transactions fun- damentally alter the nature of a share- holder's investment and therefore should be subject to shareholder approval. Applying that rationale, shouldn't all shareholders, regardless of whether their shares carry voting rights, have the right to participate in the decision? While that is the case in most Canadian jurisdic- tions, it is not the case in all. Under ss. 183(3) and 189(6) of the Canada Business Corporations Act, each share carries the right to vote on an amalgamation or extraordinary sale regardless of whether it otherwise carries the right to vote. There are similar provisions in corporate stat- utes in most provinces and territories. In Ontario, however, holders of a non- voting class of shares are only entitled to vote on an amalgamation or extraordinary sale if the transaction would affect that particular group of shareholders different- ly than holders of another class of shares. So long as all shareholders are treated equally, holders of non-voting shares don't have the right to vote. Similarly, in British ederal and provincial cor- porate legislation provides the basis for the relationship between shareholders, as owners of a company, and the Columbia, the transaction need only be approved by holders of two-thirds of the outstanding voting shares. This approach maintains consistency, with decision-mak- ing authority resting with the same group of shareholders that has the power to elect the directors and otherwise votes on any other matter submitted for shareholder approval. In addition, given Ontario's leg- islation ensures non-voting shareholders participate in the decision-making pro- cess if the transaction may lead to inequi- table treatment among shareholders, what is the harm in leaving the decision to the holders of voting shares if all shareholders will be treated identically? As a matter of principle, empowering a corporation to fundamentally alter the nature of its shareholders' investment by merging or selling some or all of its busi- ness and potentially taking the company in a whole new direction, without giving all shareholders a voice, seems unfair. If the directors of a company make this decision in a manner consistent with their fiduciary and statutory responsibilities, each shareholder who is against maintain- ing its investment in this newly consti- tuted, and materially different, business should have a voice in the decision, or at least an exit mechanism. Under Canadian corporate law, this exit mechanism is provided through the grant of dissent rights. Any shareholder who votes against an amalgamation or extraor- dinary sale may require the company to purchase its shares for fair value, provided it complies with the formal requirements in the applicable statute. If fair value can- not be agreed upon, the courts can fix fair value and may refer to an appraiser before making a decision. However, these dissent rights are only granted to shareholders entitled to vote on the particular transac- tion. Accordingly, in Ontario, holders of non-voting shares who are against the transaction must find some other means of exiting their investment (presumably by selling shares to someone who wants to invest in the company post-amalgamation or sale), while holders of voting shares in similar circumstances are entitled to be bought out by the company itself. In times such as these, when industries are consolidating and companies con- templating restructurings, businesses are closing, and other means of rationalizing costs or winding up operations, this dif- ference between the rights afforded to shareholders under the various Canadian corporate statutes is increasingly impor- tant to investors. Given that the use of non-voting shares has become more prev- alent over the last 70 years as a means for companies to raise capital and incentivize employees without affecting control, and address restrictions on foreign ownership and control in certain regulated indus- tries, we should consider whether legisla- tive reform is required in provinces like Ontario that may not provide sufficient protections for non-voting shareholders. At a minimum, if decision-making power on fundamental changes should rest with the holders of voting shares (unless holders of non-voting classes of shares are affected differently), as a matter of fairness, dissent rights should be extended to all shareholders. That way, the transaction may proceed if approved by the requisite level of voting shareholders, and any shareholder that objects has an available means of exiting its investment by being bought out by the company that initiated the transaction. Cheryl Satin is a partner at Blake Cassels & Graydon LLP in Toronto practising in the business group. She can be reached at cheryl.satin@blakes.com. www.CANADIAN Lawyermag.com FEBRUA R Y 2011 15