Problem for a Licensee Asked to Sell a Shareholder’s Interest in a Company Incorporated Under the Provisions of the Companies Act #16

By Gerry Neely
B.A. LL.B.

A recent arbitration held in accordance with the by-laws of the B.C. Real Estate Association highlighted the problem for a licensee who is asked to sell a shareholder's interest in a company incorporated under the provisions of the Companies Act. While we do not have a copy of the decision which would disclose the facts, they apparently were similar to the following example which will suffice for the purpose of this column. One of two shareholders of a limited company asked a licensee to find a buyer for his shares. The licensee was able to do that but when an attempt was made to register the transfer of the shares, the other shareholder was successfully able to purchase them, notwithstanding the contract entered into by selling shareholder and a third party. The reason for this lay in the restrictions on the transfer of shares contained in the articles of association of the incorporated company.

The majority of companies incorporated in British Columbia are non-reporting companies which characteristically have only one or two shareholders; the directors, officers and owners are usually identical and in almost 100% of the incorporations, the stock is subject to restrictions on transfer. The restrictions may be as broad as giving the directors an absolute discretion to refuse to register the transfer of shares or to disclose the grounds for a refusal, to restrictions which establish a method by which shares must first be offered to existing shareholders who will be given a limited period of time within which to purchase the shares at the price set by the seller. Failing that, the selling shareholder is entitled to sell his shares to an outsider at a price no less than that offered to the other shareholders. If he is unsuccessful and wants to reduce the price of the shares, the other shareholders will again have the opportunity to purchase the shares at the reduced price and only after they have declined to do so, may the seller offer them for sale to outsiders.

The first enquiry to be made by a licensee who is asked to sell shares in an incorporated company, is to determine what the restrictions are and whether a selling shareholder has complied with them, or whether the other shareholders are prepared to waive their rights, or directors prepared to consent to a prospective sale, and if so, upon what limiting terms either the shareholders or directors might place upon their waiver or consent respectively. There are several other circumstances of course, where a selling shareholder may not be entirely free to dispose of his shares. Those circumstances would include an existing buy-sell agreement with the other shareholders. In addition, a licensee should be satisfied that the shares are not hypothecated as security for a loan since if the value of the shares is less than the amount of the loan, even the licensee must be satisfied that the creditor will release the shares upon payment of such lesser sum.

The sale by one partner of an interest in a partnership occurs infrequently, but when it does, it is governed either by the agreement among the partners or by the Partnership Act. In the absence of an agreement, the Partnership Act provides that no person may become a partner without the consent of all existing partners. However, a partner may assign his share in the partnership to an outsider who is entitled as a result of that assignment, to receive the share of the profits to which the assigning partner would have been entitled and in the event of dissolution of the partnership, the share of the partnership assets to which the assigning partner was entitled as between himself and the other partners. The purchaser is not however, entitled to interfere in the management or administration of the partnership business, or to require any accounts of partnership transactions, or to inspect the partnership books. Once again then, before attempting to dispose of a partnership interest, a licensee should determine from the other partners whether their consent will be forthcoming and if so, upon what terms.

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