CRA indicates that a right to find a 3rd party purchaser for another’s shares is not a s. 251(5)(b)-style right

Ss. 256(1.4) and 251(5)(b) reference a right (including a contingent right) to, or to acquire, shares and a right to cause a corporation to redeem shares. There is not considered to be such a right where the shareholders’ agreement for a corporation carrying on a franchised operation (“Franchisee”) specifies that in the event that the individual manager of Franchisee (who holds 50% of Franchisee’s commons shares) departs, the other 50% common shareholder (the Franchisor) has the mandate to find an third party to purchase the manager’s shares.

The question also asked (somewhat innocently of corporate law) about the treatment of a clause in the shareholders’ agreement providing that the Franchisee would automatically repurchase the manager’s shares in the event of his departure. CRA referenced a previous ruling “that a person does not generally control the triggering of an event where a corporation is obliged to redeem or purchase shares of its capital stock held by a shareholder convicted of defrauding the corporation,” but was reluctant to answer this question without more facts and analysis, and also appeared to indicate that s. 251(5)(b)(ii) could be engaged by a right to cause shares to be redeemed that did not arise until the occurrence of a triggering event that was beyond the person’s control.

Neal Armstrong. Summaries of 7 October 2016 APFF Roundtable, Q.7 under s. 256(1.4)(a) and s. 251(5)(b)(ii).