Photo of Joe BrennanAndrew HillBy Joe Brennan and Andrew HillFebruary 16 2016
Business Law

When Is Shareholder Approval Required?

Most corporate legislation in Canada requires shareholder approval for the sale of all or substantially all of the property of a corporation.  However, there is no bright line quantitative test for determining when "substantially all" of the property of a corporation has been sold. The key test applied by Courts when determining what constitutes "substantially all" of a corporation's assets is a “qualitative test” which asks the following questions:

  1. Will the sale of the assets in question fundamentally change the corporation's core business?
  2. Is the transaction out of the ordinary such that it will substantially affect the company's purpose and existence?

If the answers to the above questions are yes, it is likely that shareholder approval will be required.

Note that a corporation must consider not only sales of its own assets but also the sale of assets by its subsidiaries as the Courts look at the consolidated entity when examining these questions.

Sample Fact Scenario

Consider the following scenario:

You are a director of ABC Corp., a corporation incorporated under the Business Corporations Act (Alberta). ABC Corp. has a 100% wholly-owned subsidiary, XYZ Corp. whose business accounts for about 75% of ABC Corp.'s assets on a consolidated basis. 

The board of ABC Corp. is considering a sale transaction whereby either XYZ Corp. or all of XYZ Corp’s business will be sold to a purchaser. You want to complete the sale in the most efficient, streamlined manner possible while ensuring that all relevant corporate laws are complied with.

Section 190 of the Alberta Business Corporations Act provides that:

A sale, lease or exchange of all or substantially all the property of a corporation other than in the ordinary course of business of the corporation requires the approval of the shareholders…

You wonder if the sale of either XYZ Corp. or all of XYZ Corp’s business  would constitute a sale of "substantially all" of ABC Corp’s property, and whether this particular deal would be "in the ordinary course of business" of ABC Corp. You are concerned that, if you are required to obtain shareholder approval, the process will be difficult, costly and time consuming, and dissident shareholders may hold up the deal. You are hopeful that this particular deal falls outside of the ambit of Section 190.

Unfortunately, there is no bright line quantitative test for when "substantially all" of the property of a corporation has been sold. 

While the Courts rely on both a quantitative and qualitative test to make the determination, the quantitative test is usually just illustrative and the Courts tend to use the qualitative test for their final determination.

At least one Canadian Court has found that selling 75% of a business should be put to the shareholders. However, that finding was not meant to establish 75% as a bright line test, and was just reflective of the facts of that particular case.  Depending on the circumstances, some Courts have not required shareholder approval where more than 75% of the value of the business is sold. In those cases, the Courts found that the "underlying or core business" of the corporation was "the acquisition, operation and then sale of different businesses". Therefore the corporation's core business did not change as the result of the disposition of certain assets, and the dispositions were not out of the ordinary.

On the other hand, some Courts have required shareholder approval where less than 75% of the value of a business is sold.  In those cases, all of the operating assets were sold, effectively changing the company from an operating company to a holding company.

So the key test applied by Courts when determining what constitutes "substantially all" of a corporation's assets is the “qualitative test”:

  1. Will the sale of the assets in question fundamentally change the corporation's core business?
  2. Is the transaction out of the ordinary such that it will substantially affect the company's purpose and existence?

A qualitative analysis seeks to determine the nature of a transferor's core business activities, and the property involved in carrying out such activities. 

The purpose of the inquiry is to assess whether the transferred property is integral to the transferor's traditional business, such that its disposition or transfer strikes at the heart of the transferor's existence and primary corporate purpose.

If the answer to the above questions is yes, then the transaction must be examined on a consolidated basis to determine whether it involves the sale of substantially all of a corporation's assets. This would include looking at the sale of the assets of a subsidiary.

Let's return to the scenario we started with. Based on a quantitative analysis, the sale of 75% of ABC Corp.'s assets may create a presumption that substantially all of its assets are being sold. Unless the "underlying or core business" of ABC Corp. is "the acquisition, operation and then sale of different businesses", then this sale would be substantial and “out of the ordinary”. 

You must now ask yourself whether ABC Corp. will be able to carry on its core business after the sale. Will its purpose change from being an operating company to a holding company? 

If ABC Corp.'s core business and corporate purpose will be fundamentally changed, then shareholder approval will be required whether ABC Corp. sells its shares of XYZ Corp. or sells XYZ Corp.'s assets instead.

Whether or not shareholder approval is required for the sale of part of a business will always depend on the facts of each particular case. You should consult an experienced business lawyer to help you determine the best course of action based for the deal your business is contemplating.

Invitation for Discussion:

If you would like to discuss the topics raised herein or any other business law matter, please do not hesitate to contact one of the lawyers in the "Business Law" group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing, and the attached document, are for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

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