This is part 1 of a 2-part blog series.  See part 2 here.

What Minority Shareholders Need to Understand in Ontario

Minority shareholders are often told that once another shareholder owns ninety percent of a corporation and controls the board, the outcome is inevitable. The reasoning usually sounds simple. The corporation is solvent. The majority shareholder is the sole director. Corporate formalities are followed. Therefore, the majority can pay themselves management fees or declare dividends and take the money.

Ontario law does not fully support that conclusion. However, the practical reality is more nuanced and more uncomfortable.

While the law provides strong protections for minority shareholders, those protections are usually enforced after the money has already left the corporation, through court proceedings that require time, legal fees, and strategic resolve.

The real world fact pattern

This scenario arises most often when a new shareholder is brought into an existing corporation.

The corporation has accumulated cash, income producing real estate, or other valuable assets. A new shareholder subscribes for additional shares and becomes a ninety percent shareholder. Using that voting power, the minority director is removed and the new majority appoints themselves as the sole director. Shortly thereafter, the director pays themselves a large management fee or declares a substantial dividend that removes most of the cash from the company.

The minority shareholder is left holding a small percentage of a company that has been materially hollowed out.

From a practical standpoint, this can happen. Corporate bank accounts do not stop payments simply because a transaction may later be challenged. If the majority controls the board and has signing authority, funds can be moved.

The legal issue is not whether the money can be taken, but whether it can be kept.

Solvency allows the first move, not the last word

Under the Ontario Business Corporations Act, dividends may only be declared by directors and only if the corporation satisfies the solvency test. If the corporation is solvent, a dividend may be technically valid at the time it is paid.

Solvency, however, is not a shield against later claims. It simply means the dividend is not automatically illegal. It does not prevent a minority shareholder from arguing that the transaction was oppressive, unfairly prejudicial, or a breach of fiduciary duty.

The same principle applies to management fees. A sole director can approve and pay a fee. The money may leave the account. But once that happens, the director must justify the payment as commercially reasonable and genuinely connected to services rendered.

Management fees are not a safe alternative to dividends

Management fees are often viewed as a workaround. In reality, they are often more vulnerable than dividends.

Unlike dividends, management fees are discretionary and non proportional. Courts scrutinize their timing, size, purpose, and effect. When a large fee is paid shortly after a change in control, it is frequently characterized as self dealing or disguised profit extraction rather than legitimate compensation.

From a minority shareholder perspective, management fees are one of the most common ways value is extracted and one of the most common bases for litigation.

The oppression remedy still applies

Ontario law provides minority shareholders with the oppression remedy. It allows a shareholder to seek relief where corporate conduct is oppressive, unfairly prejudicial, or unfairly disregards their interests.

This remedy does not require insolvency. It does not disappear because voting rules were followed. Courts look at the overall course of conduct, including whether control was consolidated and value was extracted in a way that defeated reasonable shareholder expectations.

However, oppression relief is not automatic. It requires court proceedings, evidence, and legal expense. It is a powerful remedy, but it is reactive.

The practical takeaway

A ninety percent shareholder with control can often take the money first and deal with the consequences later. Minority shareholders are protected by the law, but that protection usually comes through litigation after the fact.

This is why prevention matters more than theory.

Which leads to the most important question. What should minority shareholders do before control shifts?

That is the focus of Part 2. Which can be found here

How Rabideau Law helps at this stage

Rabideau Law advises shareholders and investors before new capital is introduced and before control changes occur. The most effective protection is built into the structure of the transaction, not argued in court after value has already left the company.

If you are bringing in a new shareholder or being asked to accept dilution, the time to address these risks is before the shares are issued.