“Liquidity” means the capacity of a shareholder to liquidate his interest in a corporation. In a publicly traded corporation, a shareholder can place his shares with a broker for a trade in a stock exchange and receive the market value of his shares.
By stark contrast, not only are the majority of corporations in Ontario “private” corporations (which means not on any stock exchange) but in addition, there is no certainty of “liquidity”.
In the absence of one or two exceptions, a shareholder in a private corporation has no right to require a corporation or fellow shareholders or any third party to buy out his shares. Essentially, if the “bloom falls off the rose” in a private corporation, a shareholder, who seeks to exit, has no capacity to get paid out either his original investment or any value of his shareholdings.
That’s one of the main reasons why most commercial lawyers recommend “Unanimous Shareholder Agreements” (a “USA”) which could provide for the liquidity that is not available generally to any investor in a private corporation. A USA can provide for resolutions of shareholder disputes and potential “liquidity” for a shareholder who desires to leave the entity by way of “shot-gun” clauses, “puts” or “redemption”.
Shareholder disputes involving a shareholder who wishes to leave the corporation for whatever reason are extremely difficult to resolve and can be fraught with the same emotional attachments arising in the matrimonial breakdown. There is a parallel with a loss of trust and confidence and a desire to go separate ways.
So, starting from the proposition that there are no rights of a shareholder to require either other shareholders or the corporation to allow a shareholder to exit with repayment of shareholder loans, repayment of the share purchase price, division of spoils, fair market value or a share of the assets of the corporation, negotiating, on behalf of a shareholder who wishes to leave, necessitates pressure on the remaining shareholders. In the absence of a fair and reasonable resolution, the shareholder seeking to depart may have to initiate a process potentially causing or resulting in the dissolution or wind-up of the corporation. In the absence of justification (such as oppression, inappropriate behaviour, or conduct justifying the shareholder desiring to leave being protected by the Courts), liquidity is far from certain.
This is reinforcement for the proposition that:
- When you invest in a private corporation, recognize that your investment may never be realized, regardless of the success of the business; and
- When you get in, figure how you are going to get out. And get it in print.