Ironically some welcome news relating to valuation principles for shareholders of many small closely-held corporations comes from the Supreme Court of Canada’s recently released reasons for its decision involving the then proposed $52 billion leveraged buy-out of publicly traded BCE Inc. 1
In recent years, the Canada Revenue Agency (CRA) has assessed shareholders, or their estates, on the basis that voting shares of private corporations warrant a significant valuation premium. Particular examples include the CRA assigning significant value to even voting scrip shares deemed to be disposed of immediately before death. The CRA’s actions are not supported by any published administrative policy but seem to arise from an unpublished approach followed by a collection of “empowered” auditors.
If the CRA were to be found to be correct, the implications for most estate freezes would be wide ranging and would in large measure defeat the object of many family freezes where the parents wish to retain control.
In pursuing these assessments, the CRA appears to view the leading case of Re Mann Estate2 as either too old to carry weight or limited to its facts.
In this article, I will review the key principles derived from Mann Estate and how the Supreme Court of Canada’s reasons in BCE serve to update and reinforce the Mann Estate principles.
In Mann Estate the deceased had owned 1% of the equity shares (represented by Class B common shares) in a small family investment corporation. The deceased’s shares were the only voting shares. The remaining 99% of the equity shares (which were non-voting and represented by Class A common shares) were held equally by the deceased’s son and daughter. The net value of the corporation based upon a wind-up was determined to be $149,562.03.
For succession duty purposes, the Provincial Crown had assessed the deceased’s Class B common shares (1% of equity; 100% of votes) to have a value of $81,000. The Provincial Crown’s view was that a new holder of the deceased’s shares would by use of the 100% voting power be able to extract an annual management fee of 4% of the capital assets which would equal $81,000, when such fees were present valued.
The reasons of the trial judge, Justice McIntyre (as he then was3), were approved by both the BC Court of Appeal and the Supreme Court of Canada. In his reasons, the trial judge first adopted the conventional meaning to fair market value:
‘fair market value’ is the highest price available estimated in terms of money which a willing seller may obtain for the property in an open and unrestricted market from a willing, knowledgeable purchaser acting at arm’s length.
The trial judge then addressed the Crown’s argument that by holding all the voting power a hypothetical purchaser would be able “to deal with the assets and affairs of the company to suit himself and to his own advantage.” The trial judge reasoned that the oppression remedies under the relevant company law would prevent such actions by the holder of the voting shares. The trial judge stated:
19 The answer to this proposition is to be found in the argument of the appellants. The appellants say that the Class A shareholders would not be prepared to stand by and see the assets of the company drained away for the benefit of the Class B shareholder. They would certainly move under ss. 185 [oppression] and 219 [just and equitable wind-up] of The Companies Act, R.S.B.C. 1960, c. 67. The purchaser must be taken to be aware of those sections and the hazard they present to him. Knowledge of this danger would be a factor which he would weigh in his mind and which would materially affect his estimate of value and would, in my view, materially reduce any estimate of value. The factor was not considered by Mr. Anson-Cartwright and when it was suggested to him as a consideration in cross-examination, it was more or less brushed aside.
20 Many cases were cited on this question by both parties including, among others: Re H. R. Harmer Ltd.,  1 W.L.R. 62,  3 All E.R. 689; Re National Building Maintenance Ltd.,  1 W.W.R. 8 (B.C.); Greenhalgh v. Arderne Cinemas Ltd. et al.,  Ch. 286,  2 All E.R. 1120. Counsel for the respondent argued at length that the schemes propounded were not subject to attack under ss. 185 and 219 as being oppressive. This, however, begs the question. It is clear from the cases cited that the circumstances which would give success to a petitioner under those sections are many and various. It is hard, in fact, impossible, to lay down any fixed rule to cover, or any definition to describe what will suffice to procure an order under ss. 185 and 219. It is no part of my function in this case to say whether the schemes proposed by Mr. Anson-Cartwright could be successfully attacked under those sections or not. It is, however, abundantly clear that a purchaser of the Class B shares who undertook schemes of the kind described by Mr. Anson-Cartwright in the circumstances of this case would face the great possibility, even the certainty, of an attack under ss. 185 and 219 of The Companies Act, by the other shareholders. It is also clear from the cases that there would be at least a substantial chance of success. These facts must be taken to be within the knowledge of the purchaser and they would, of course, affect his estimate of value. If such an attack succeeded and a winding-up of the company followed, it would be disastrous for the purchaser envisioned by Mr. Anson-Cartwright.
Presumably, the CRA’s basis for distinguishing its current assessing approach from Mann Estate is that while the trial judge rejected the valuation of the Crown’s expert, he nevertheless left open the possibility that there could be some value attributable to the voting rights. In this regard, the trial judge stated:
It is not necessary to say that the possibility of a Class A shareholders’ attack under those sections of the Act would deprive these shares of any value in excess of their break-up value.
For our purposes, the importance of the Supreme Court of Canada’s reasons in BCE is the Court’s description of that which is generally referred to as the oppression remedy under the Canada Business Corporations Act4 (CBCA). The relevant provision, section 241 of the CBCA, refers more specifically to conduct that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder…” The CBCA provisions are similar to those under provincial company laws such as the British Columbia Business Corporations Act5.
In BCE the plaintiff debentureholders challenged a proposed leverage buy-out of BCE on two basis, one of which was oppression under section 241 of the CBCA. The debentureholders’ argument was that with the additional debt to be borne by BCE as part of the proposed leverage buy-out was the result of conduct which falls within the meaning of “oppression”, “unfair prejudice”, or “unfair disregard” as contemplated in section 241 of the CBCA.
From the debentureholders’ perspective, even the announcement of the proposed transaction had caused a decrease in value of the debentures of approximately 20%.
Subsection 241(2) of the CBCA provides that a court may make an order to rectify matters where:
(a) any act or omission of the corporation or any of its affiliates effects a result,
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or
(c) the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner
that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer....
The Court adopted a two step approach. First, was there a breach of a reasonable expectation of the claimant? Second, if a breach of a reasonable expectation were to be established, was the conduct such that it amounted to “oppression”, “unfair prejudice” or “unfair disregard” as contemplated by section 241 of CBCA?
For our purposes, the Court makes a number of observations. As a preliminary observation the Court stated:
 First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: (cites omitted). It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: (cites omitted).
 Second, like many equitable remedies, oppression is fact-specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.
The Court also described in general terms “oppression”, “unfair prejudice” and “unfair disregard”. The Court stated:
 Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the s. 241 oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241. The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81-88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.
The fact that the oppression remedy is based on fairness, business realities (and not narrow legalities), and the relationships at play leads to uncertainty as to whether or not an oppression remedy will be triggered. Potential investors do not place value on uncertainty.
In connection with closely-held corporations, the Court observed:
 The size, nature and structure of the corporation are relevant factors in assessing reasonable expectations: First Edmonton Place; G. Shapira, “Minority Shareholders’ Protection — Recent Developments” (1982), 10 N.Z. Univ. L. Rev. 134, at pp. 138 and 145-46. Courts may accord more latitude to the directors of a small, closely held corporation to deviate from strict formalities than to the directors of a larger public company.
 Reasonable expectations may emerge from the personal relationships between the claimant and other corporate actors. Relationships between shareholders based on ties of family or friendship may be governed by different standards than relationships between arm’s length shareholders in a widely held corporation. As noted in Re Ferguson and Imax Systems Corp., (1983), 150 D.L.R. (3d) 718 (Ont. C.A.), “when dealing with a close corporation, the court may consider the relationship between the shareholders and not simply legal rights as such” (p. 727).
The task of undertaking due diligence in connection with a share purchase is often difficult. In the context of a closely-held corporation where family history, past practices and past representations may all be in play, the task is considerably more difficult with little assurance of certainty.
In short, BCE makes clear the many factors that a “willing, knowledgeable purchaser acting at arm’s length” would have to weigh and consider, especially in the context of a closely-held corporation.
Few purchasers wish to buy potential litigation.
In summary, while a purchaser would undoubtedly rather have voting than non-voting shares, the value to be ascribed to such shares should not be significant in light of the oppression remedy as set forth in Mann Estate and now having been updated and detailed by the Supreme Court of Canada in BCE.
Business Vehicles, Volume XII, No. 3, 2009