Will a shareholder agreement that permits a minority shareholder to elect the majority of the corporation’s board confer control on the minority shareholder? The Tax Court in Kruger Wayagamack Inc. v R, 2015 TCC 90, said not if the minority shareholder, despite its control of the board, does not have “effective control”:
The TCC reasoned that “effective control” (as described in Duha [1998 CanLII 827 (SCC)]) of a corporation can be diminished if, pursuant to a USA, decisions are required to be unanimous. For instance, even if one shareholder has a majority of the voting shares and elects the majority of the directors, if he or she does not have the ability to exert a “dominant influence” over the management, direction, or orientation of the future of the corporation, that shareholder does not have “effective control” of the corporation. Essentially, Kruger [the minority shareholder with control of the board] was found not to have control because it did not have the ability to make strategic decisions that would change the direction of the company; such decisions required the unanimous agreement of the directors or shareholders. The court did not inquire into the actual operations of the company; instead, it relied on the content of the shareholders’ agreement.
—Jennifer Leve and Nathan Wright, “De Jure Control May Require ‘Dominant Influence'”, Canadian Tax Focus 5:3 (August 2015)
