The Importance of Shareholder Agreements Reinforced in the Dare Foods Case
Case Summary – Wilfred v Dare et al., 2017 ONSC 1633 (CanLII)
By Janice Perri and Anton M. Katz
Carolyn-Dare Wilfred, Bryan Dare, and Graham Dare owned all the shares of the Dare Food Company. Carolyn’s claim that she met the oppression remedy requirement under s. 248(2) of the Ontario Business Corporations Act (the “OBCA”) failed, and the decision is summarized below.
In 1980, Carl Dare (Carolyn, Bryan, and Graham’s father) did an estate freeze and transferred his shares in the three operating companies (Dare Foods (Biscuit Division) Limited, Dare Foods (Candy Division) Limited, and Dare Foods Limited) to a newly created holding company – Serad Holdings Limited (“Serad”). The common shares of Serad were issued to a newly created family trust – the Dare Family Trust (the “Trust”) – with Carolyn, Bryan, and Graham as beneficiaries. A series of shareholder agreements were entered into for Serad in which Carolyn, Bryan, and Graham signed as beneficiaries for the Trust. The second shareholder agreement contained restrictions on the future transfer of the shares of Serad by Carolyn, Bryan, and Graham. It contained a “right of first offer” clause – that if Carolyn, Bryan, or Graham wanted to sell their shares of Serad, the shares must be offered to the other two family members at fair market value. If the offer is declined, the shares can then be sold to a third-party purchaser but only “at a price not less than” and on “terms not less onerous” than those offered to the members.
In May 2001, the common shares of Serad were distributed to the beneficiaries equally. Upon receiving the Serad shares from the Trust, Carolyn, Bryan, and Graham confirmed and re-evaluated the second shareholder agreement.
In July 2001, Carolyn sent a notice of sale pursuant to the shareholder agreement. Bryan and Graham rejected her offer to sell her Serad shares. After various discussions, Carl proposed that Serad would redeem 25% of her shares for $5 million, terminate her $50,000 salary, and provide her with annual dividends of $335,000 for five years. In exchange, she would not attempt to sell or redeem any of her remaining shares for five years. Carolyn accepted the proposal.
In January 2014, Mr. DeVries (Carolyn’s then counsel) wrote to Dare Foods’ counsel offering the sale of Carolyn’s shares for $55 million which was rejected, and the same offer was also rejected in July 2014.
Carolyn’s position was that the defendants’ conduct was unfairly prejudicial to or unfairly disregarded her interests as a shareholder of Serad by: 1) refusing to purchase her shares which has the effect of preventing her from realizing her valuable asset at a time when she needed money and 2) the alleged inequity of Serad’s dividend policy since Carolyn had no input. Carolyn claimed she met the oppression remedy requirement of s. 248(2) of OBCA and that the appropriate remedy was a court-ordered buyout of her shares of Serad under s. 248(3)(f) of OBCA.
The Court deemed that Carolyn did not have a reasonable expectation of liquidity for her Serad shares. Though the second shareholders agreement had a right of first offer, it in no way required any of Carl’s children to purchase shares from one another since the second shareholder agreement did not have a shotgun buy-sell clause nor a put right. It created no obligations on Carl’s children, only the opportunity to purchase one another’s shares at fair market value before those shares are offered to a third party. Carolyn agreed to this provision at the time of the estate freeze in 1980, again when the Serad shares were transferred to her personally in 2001, and was aware of this when she tried to sell her shares in 2001, 2004 and 2014.
Carolyn argued that since her shares are unmarketable and have no value to a third-party purchaser, a court-ordered buyout was warranted, however there was no independent evidence to support these claims. The oppression remedy in s. 248 was not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of oppressive or unfair conduct. The refusal of the defendants to purchase her shares was not in itself a basis for relief under s. 248. Furthermore, by seeking to have Serad use its resources to purchase her shares, she put her own interests ahead of those of the corporation. Carolyn did not meet the onus of proving that she had a reasonable expectation that the defendants would purchase her shares of Serad.
Until 2001, Carolyn had no reasonable expectation that she would receive any dividends from the business and only had a reasonable expectation that she would receive dividends in the range of $341, 250 per year from 2001 onwards. Carolyn argued her interest as a shareholder of Serad had been unfairly disregarded or prejudiced because she received $341, 250 dividends from Serad while her brothers received other sources of income from the business. This submission was rejected, as her brothers worked in the business for over 30 years while Carolyn never played a role in the Dare Foods business.
This case highlights the value of having a shareholder agreement. Without such an agreement, a shareholder is left to rely on the oppression remedy requirement under s. 248(2) of OBCA. In order to attain an oppression remedy, one must pursue costly and time-consuming litigation with an uncertain outcome. Even a vulnerable minority shareholder may fail to establish that there was a reasonable expectation to purchase his/her shares – as was the case with Carolyn.
Shareholder agreements are currently underused, but they cannot be undervalued. A shareholder agreement provides an important safeguard that allows shareholders to govern their rights and obligations by setting out specific clauses in advance that explicitly address certain contingencies. The Dare Foods case emphasizes that simply having a shareholder agreement is not enough. Shareholders ought to play an active role in contributing to and closely evaluating the proposed shareholder agreement prior to entering into it, to ensure it reflects their unique interests. While it is true that no shareholder agreement can be responsive to every possible situation that may arise, the types of clauses absent from the second shareholder agreement that prevented Carolyn from succeeding in selling her shares are quite common. A shotgun clause allows, for example, shareholder A to offer to buy shareholder B’s shares at a specific price, forcing B to either accept the offer or buy A’s shares at that price. As Justice Conaway pointed out, had this been included in the second shareholder agreement, Carolyn likely would have succeeded in having her brothers buy her shares. Also, a put option is a right to sell one’s shares at a specific price when a specific event occurs – had this type of option been included in the second shareholder agreement, it too would have allowed Carolyn to avoid litigation. In this way, a shareholder agreement is an important investment and legal consultation in the drafting stages can allow one to get the most out of their investment, especially when the stakes are high, as it was in the Dare Foods case.
