When a shareholder wants out of a BC private company: the options

Business partners go separate ways for ordinary reasons: retirement, a new venture, a disagreement about direction, or a falling-out. When one owner of a private company wants out, both sides quickly discover that shares in a private company are hard to sell and that nobody is automatically obliged to buy them.

This article sets out the main exit routes under BC law, from a negotiated sale to a court application, and the points that cause most of the friction. It is written for both the shareholder who wants to leave and the owners who will remain.

Start with the documents you already have

The first question is what the owners agreed to. A shareholders' agreement may contain a buy-sell clause, a right of first refusal, a shotgun clause, a valuation formula or a payment schedule. If it does, those terms usually set the path.

The company's articles matter too. Private company articles commonly require the directors' approval before shares can be transferred, and under section 77 of the Business Corporations Act a company can purchase its own shares only if its memorandum or articles authorize it, subject to any restrictions they contain.

If there is no shareholders' agreement, there is generally no right to force the others or the company to buy you out, and no obligation on them to do so. The exit then has to be negotiated, unless the circumstances support a court application.

Option 1: sell the shares to the other shareholders

The most common exit is a sale to the remaining owners. The parties agree on a price, often based on a valuation, and sign a share purchase agreement covering the price, payment terms, any security for deferred payments, releases and restrictions such as non-solicitation. The directors approve the transfer if the articles require it, and the company records it in its central securities register (section 111).

Remaining shareholders often cannot pay the full price at once, so payment over time with security is common. The departing owner will want to be released from any personal guarantees of company debts as part of the deal.

Option 2: the company buys back the shares

Instead of the other owners paying, the company itself can purchase the departing shareholder's shares if its articles allow it. The Act limits this. Under section 78, a company must not pay to purchase its own shares if there are reasonable grounds for believing it is insolvent, or that the payment would make it insolvent. Insolvent means unable to pay its debts as they become due in the ordinary course of business.

After the purchase, the company must cancel or retain the shares as section 82 requires and update its registers. The tax treatment of a buyback can be quite different from a sale to another shareholder, so the departing owner and the company should each get tax advice before choosing between them.

Option 3: a sale to an outside buyer

A departing shareholder can look for an outside buyer, but in practice minority shares in a private company attract few buyers. Transfer restrictions in the articles and any right of first refusal in a shareholders' agreement will also apply. This route is more realistic when the whole company is being sold.

Leaving the board and the payroll

Many shareholders are also directors or employees. Selling shares does not end those roles. A director resigns in writing, effective when the resignation is given to the company or on a later date it specifies (section 128), and the company must file a notice of change of directors within 15 days (section 127). Employment ends on its own terms and should be dealt with in the exit documents, along with any shareholder loans owed in either direction.

When negotiation fails: the court's powers

If the relationship breaks down, section 227 allows a shareholder to apply to court on the ground that the company's affairs are being conducted, or the directors' powers exercised, in a manner oppressive to shareholders, or that a company act or resolution is unfairly prejudicial to them. The court can make any order it considers appropriate, including directing the company or another shareholder to purchase the applicant's shares. A company purchase ordered by the court is still limited by a solvency test (sections 227(5) and (6)), and the court may make an order only if the application was brought in a timely manner.

Courts assess these claims by looking at the reasonable expectations of the shareholders, an approach the Supreme Court of Canada set out under the federal corporations statute in BCE Inc. v. 1976 Debentureholders. Separately, section 324 lets the court order a company liquidated and dissolved where it considers that just and equitable, and the court may instead make an oppression-type order.

Court proceedings are slow and expensive for everyone, and the outcome is uncertain. Their main practical value is often in framing a negotiated buyout. Whichever side you are on, get advice early, before positions harden.

Planning a shareholder exit? Get the terms right before anyone signs

Our business lawyers can review your shareholders' agreement and articles, advise on a sale or company buyback, prepare the share purchase and release documents, and advise on your options if negotiations break down.

Call 604-259-2844 or send us a message to arrange a consultation at our Vancouver office.