On the topic of corporate governance, it’s generally recognized that corporations are largely controlled by their directors and officers. However, shareholders, through a variety of mechanisms, including veto rights and multi-voting share classes, can shift power in their direction and away from directors. This results in a grey area of liability. A classical interpretation of shareholders’ rights and obligations suggests that they are not obligated to consider interests outside of their own when exercising their rights as shareholder. Nevertheless, given the authority that some shareholders wield, other stakeholder interests might have to be taken into consideration.
Directors and Shareholders: The Common View
Directors have a well documented duty of loyalty, which requires that they consider the best interests of the corporation, and exercise the care, diligence, and skill that a reasonably prudent person would exercise, when making decisions. The “best interests of the corporation” include the interests of a broad brush of corporate stakeholders such as shareholders and employees, the environment, and the long-term interests of the corporation.
Like directors, shareholders have rights and powers granted to them by law and often have other rights that are negotiated rights, that would typically be included in a shareholder or rights agreement. Unlike directors, shareholders are not bound by any formal fiduciary duty to the corporation. They can act and make decisions in their sole interest and are not barred from prioritizing their best interests in both the long and short term.
Authority otherwise held by the Board
Section 146(5) of the Canada Business Corporations Act (CBCA) states the following: “To the extent that a Unanimous Shareholders Agreement (USA) restricts the powers of the directors to manage, or supervise the management of the business affairs of the corporation, parties to the USA who are given [these powers] have all the rights, powers, duties and liabilities of a director […].” Similar provisions are found in section 108(5) of the Ontario Business Corporations Act (OBCA) and section 214 of the Quebec Business Corporations Act (QBCA).
In certain instances, shareholders exercising veto powers can restrain the ability of a board of directors to act in the best interests of the corporation. For example, it is not uncommon for private equity investors to be granted the right to restrict directors from issuing shares, hiring and removing officers, declaring dividends, and approving mergers, to name a few. In exercising those veto powers, shareholders typically act exclusively with their self interest in mind.
Paul Martel briefly explores the issue by highlighting the existence of this grey area in the transfer of responsibility from directors’ duties to shareholders, in situations where there is indirect control from shareholders through veto rights, for example.
While case law is limited in this area in Quebec and Canada, in the United States, the most relevant case on this matter may be Skye Mineral Investors, LLC v. DXS Capital Limited. In this case, the Delaware Court of Chancery evaluated a situation whereby the minority shareholders of Skye Mineral orchestrated a plan to lead the corporation into bankruptcy by using, in an abusive and bad faith manner, their expanded veto power granted in the shareholders’ agreement. This allowed them to block any lending to the corporation. The veto was executed by the minority shareholders to buy back the corporation’s assets for a small fraction of their actual value.
The Delaware Court held that it was reasonably conceivable that Skye Mineral’s two minority shareholders intentionally used their contractual veto rights to harm the corporation, and thereby increase their own influence for their own purposes. This decision implies that minority members who exercise a veto may find themselves in the unexpected position of violating quasi-fiduciary duties since it is they who are sitting in the seat of power within the corporation.
Additionally, the court was not keen on the adverse consequences stemming from allowing minority shareholders to promote their own interests at the expense of the best interests of the corporation, and in doing so, potentially harming employees, the environment, society, and other stakeholders. Thus, a key consideration for the Court was whether there was a blatant abuse of power exhibited by the minority shareholders – the answer to this question being the driving factor behind their decision.
In Superior Vision Services, Inc., v. ReliaStar Life Insurance Corporation, Superior Vision’s shareholders’ agreement explicitly prohibited the payment of dividends to shareholders. However, this contractual obligation could be waived if two-thirds of the voting shareholders agreed to reverse this prohibition. The minority shareholder, ReliaStar, holding 44% of Superior Vision’s voting rights, vetoed the decision to reverse the prohibition, and was sued by the other shareholders. The aggrieved shareholders argued that by repeatedly refusing to lift the ban on dividend payments, ReliaStar was in a position of ‘real control’, and therefore possessed a fiduciary duty as the true “controller” of the corporation. Having no valid reason to refuse payment of dividends, ReliaStar breached its fiduciary duty and was in breach of exercising its right to vote in good faith.
However, the Delaware Court of Chancery did not agree that a minority shareholder’s refusal to vote in favour of a proposal was an example of exercising “real control” over the corporation. Therefore, it did not bear a fiduciary duty to the corporation. It was decided that the exercise of blocking a specific decision represents limited powers that do not represent those of “control” of a corporation. Furthermore, the court stated that a shareholder exercising a duly obtained right does not automatically imply the creation of a fiduciary duty towards the corporation. Ad contrarium however, this presupposes that in certain circumstances, a governance right may create fiduciary obligations. This rational would also align cohesively with the previously mentioned provisions of the CBCA, OBCA and the QBCA.
Courts across the continent have not associated the holding of veto powers with a fiduciary duty towards the corporation, and rightfully so in our view. The general principal of the limited liability of shareholders is certainly not in question and is at the core of the theory of a corporation. In addition, doctrines of good faith and abuse of rights may also be useful lenses from which to evaluate the rights of shareholders with important authorities on decision making powers, although such an analysis was not central to our review.
There is a prevailing assumption that directors and officers are the ultimate decision makers of a corporation, yet mechanisms such as veto rights demonstrate how power can be transferred to shareholders. The interplay between the decision-making authority of shareholders and directors continues to be a contentious thorn in the side of companies, as has been most evident in the very public Rogers dispute.
Perhaps just as important, a shareholder may also find themselves in hot water for failing to abide by an obligation they may have towards the corporation that they did not know existed when exercising one of their negotiated blocking rights. If shareholders are using powers granted to them to control decisions at the board level, they should be weighing the best interests of the corporation in doing so.
It may be foolish to assume that stakeholder interests can be adequately shielded from the power plays occurring between shareholders and directors. It is however necessary to review what duty of care a shareholder may owe to a larger net of interested parties, when such shareholder has de facto removed the board as the decision maker. The reputational risk to corporations and their foundational constructs should not be underestimated if shareholders who wield powers that would otherwise be held by the board, do so purely in their self interest.
Thomas Laporte Aust
 Section 146(5), Canada Business Corporations Act R.S.C., 1985, c. C-44.
 Section 108(5), Business Corporations Act, R.S.O. 1990, c. B. 16.
 Section 214, Business Corporations Act, c. S-31.1.
 Paul Martel and Luc Martel, ‟Les conventions entre actionnaires : une approche pratique”, Wilson & Lafleur, 12e éd. (2017), Partie II, Ch 15, p.390-391.
 Skye Mineral Investors, LLC v. DXS Capital (U.S.), C.A. No. 2018-0059-JRS.
 Superior Vision Services, Inc. v. Reliastar Life Insurance, C.A. No. 1668-n.
 Supra note 1.
 Supra note 2.
 Supra note 3.
 Pete Evans, ‟Edward Rogers wins major court battle for control of family-run telecom giant”, (November 5, 2021), online: < https://www.cbc.ca/news/business/rogers-court-ruling-1.6239278 >.