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Shareholder disputes: court-ordered investigations

Minority shareholders sometimes grow frustrated with the direction the majority are taking the company, and with their inability to effectively oppose such direction. Frequently the frustration relates to a lack of transparency: the minority feel on the outside, looking in, with regard to the affairs of the company.

As a result, when shareholder disputes arise the aggrieved shareholder group may find they do not have access to the information they need to make their case. Without access to information, the shareholders cannot take advantage of rights, such as the oppression remedy, to address corporate wrongdoing. Section 248 of the BC Business Corporations Act provides a novel solution, authorizing a court-ordered investigation and the appointment of an inspector. 

Court powers

Under the Act, on an application by shareholders representing 20 per cent of issued shares, the court has power to appoint an inspector and determine the manner and extent of an investigation into the affairs of the company. An inspector may be appointed if the court has reason to believe that:

  • the company or its directors are behaving in a manner oppressive to shareholder rights
  • business has been conducted with intent to defraud
  • the company was formed for a fraudulent or unlawful purpose, or
  • persons connected with the company have used their positions fraudulently or dishonestly.

Notice

Parties to the application for a court-ordered investigation must give notice to the company and may be required to give security for the payment of costs and expenses of the investigation.

An inspector has powers to question any director, receiver, receiver manager, officer, employee, bank official, auditor or agent of the company under oath and to examine the accounts of the company.

Conclusion

At the conclusion of the investigation, the inspector files a report to the court, with copies to the company and any other person the court orders. If the inspector is appointed by the company, he or she reports to the company and, in either case, the report is admissible in any legal proceeding, not as fact but as the opinion of the inspector. Any oral or written statement of the inspector, relating to the investigation, is subject to qualified privilege, meaning it is protected from charges of libel and slander.

The prospect of appointment of such an inspector can itself encourage settlement between the parties. 

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