O Brother, Where Art Thou? – A cautionary tale of conflict in closely-held corporations.
The recent decision of the British Columbia Court of Appeal in Petersen v Hawley, 2022 BCCA 169 provides excellent perspective on what can happen when two shareholders of a closely-held corporation come to an irreconcilable deadlock. The Court of Appeal ordered liquidation of the closely held company in this case. The decision and its underlying facts highlight that it is wise for prospective business partners to provide direction as to the resolution of future disputes by written agreement.
Petersen and Hawley were twin brothers who each held 50% of the shares of a real estate holding company called Value Equity Ltd. (“Value”).While the brothers had successfully operated the business for many years, they eventually became “entirely lacking in the mutual trust and confidence necessary to run Value’s business” and arrived at a deadlock on essentially every necessary business decision.[1] To make matters worse, they had been unable to resolve their conflict through less drastic means, such as arranging a buy-out, and ultimately were faced with the stark reality of a court-ordered liquidation of the company.
In 2021, Petersen filed a petition that sought equitable relief under s. 324 of the Business Corporations Act.[2] This provision sets out that, on an application made in respect of a company by a shareholder of the company, the court may order that the company be liquidated and dissolved if the court considers it just and equitable to do so. The chambers judge noted that the “presence of deadlock is one of the classic situations in which winding up is typically ordered” but that a finding of deadlock alone will not always be sufficient to justify a liquidation order.[3]
In this case, because Value was a closely-held company and each of the brothers contributed to the situation in which it was impossible to ever resume running the business together, the chambers judge granted the s. 324 remedy of a court-ordered liquidation.[4] In doing so, the chambers judge stayed the appointment of the liquidator for 60 days, hoping that the brothers could find “the wisdom of a refined mutual agreement, rather than a blunt force of liquidation.”[5] As it turns out, that was wishful thinking.
Hawley appealed the decision on two grounds. The first (which garnered the most discussion) was that the chambers judge erred in principle by refusing Hawley’s application for the petition to be converted to trial despite the existence of a triable issue in determining who was at fault for causing the deadlock. This ground was dismissed on the basis that the recent case of Cepuran v. Carlton 2022 BCCA 76 determined that a judge is not obliged to refer a matter to trial just by the mere fact there is a triable issue. Further, the Court of Appeal agreed with the chambers judge that the fault for the deadlock was to be shared, and a full trial would be unlikely to end the disagreement. It was held that liquidation would be more effective at disentangling the two equal shareholders and ending the deadlock.[6]
This decision shows why it is imperative for business partners to plan for the future and make written agreements about how to resolve disputes when expectations shift or if the relationship deteriorates – even if the partnership is between individuals who are very close with each other. This conflict between brothers might have been addressed early with a (relatively) mutually satisfactory arrangement. Instead, it has resulted in a protracted legal action with no real winners.
[1] 2022 BCCA 169 at para 1.
[2] S. 207 of the Manitoba Corporations Actis a similar, but not identical, provision.
[3] 2022 BCCA 169 at para 15.
[4] Ibid at para 16.
[5] Ibid at para 21.
[6] Ibid at para 30.