November 2, 2010

Corporate deadlocks and “shot gun” share buyouts


Although our practice extends deeply into administrative law, our roots lie in commercial litigation. Here’s a case where we collaborated with counsel to produce winning submissions. When groups of shareholders in a closely-held corporation hit a management deadlock, the court can, under s. 227(3) of the Business Corporations Act, S.B.C. 2002, c. 57, craft a remedy to end the conflict in lieu of a wind-up. One such remedy is a “shot gun” sale, as illustrated in Kinzie v. Dells Holdings Ltd., 2010 BCSC 1360 (September 28, 2010).

In the Kinzie case, two groups shared 50-50 voting control of a family company with a shopping centre in a developing area. When the groups could not agree on the land being retained or sold to a developer, this dispute and other factors led to a management deadlock. The first group seeking to retain the shopping centre sought an order that the second group be required to sell their shares at a particular price. The second group sought a market sale of the land, or a “shot gun” sale of shares.

The court recognized several options: liquidation; a sale of the land on the market to ensure true market value; a share purchase at a price fixed by the court; and a shot gun sale “where one party makes an offer to sell their shares to the other party at a fixed price. If the other party refuses to buy at that price, then the first party must purchase the other party’s shares at the same price.” A sale of the land on the market would, however, entail additional costs compared to a share sale, and require some degree of cooperation. As the parties could not agree on fair market value, and the market was in flux, the court was reluctant to substitute its decision for the fair market value of the shopping centre. A shot gun sale combined the advantages of a market sale with the advantages of a buyout, subject to the ability of either party to secure financing to support its offer. Furthermore, where a share buy-out is appropriate, but the neither party has engaged in oppressive or unfairly prejudicial conduct within the meaning of s. 227(2) of the Act, the court will not exclude either group from the opportunity to buy the shares of the other based on wrongdoing [27].

As both groups were equally capable of ascertaining fair market value, the court designated the second group as the initial offering party. If the first group refused the offer, it would have to sell their shares at the same price. The shopping centre was to be listed for sale on the open market if either party was unable to obtain financing to complete the purchase of shares.

Kinzie v. Dells Holdings Ltd., 2010 BCSC 1360 (September 28, 2010).