A mooted Canadian-controlled private corporation (Opco) had its voting common shares held 50-50 by a single non-resident, and by three Canadian residents. CRA accepted (following Bagtech) that a clause in the unanimous shareholder agreement that gave the three residents the right to jointly appoint two of the four directors would have avoided de jure control by the non-resident even if their collective shareholding fell below 50%.
However, CRA found that a contingent right of the non-resident to acquire the shares of a “defaulted shareholder” (e.g., on the discovery of fraud or theft) disqualified Opco as a CCPC (even though this (secondary) call right was exercisable only after failure of the other resident shareholders to exercise their first call right following the default): this represented a contingent right to acquire each resident shareholder’s shares, so that the non-resident was deemed by s. 251(5)(b)(i) to be a 100% shareholder. As a deemed sole shareholder, it no longer would be subject to the board representation clause, so that it would have an unfettered right (in this remote scenario) to appoint a majority of the board.
S. 251(5)(b)(ii) refers to a right of a shareholder (here, in the context of an alternative scenario, the non-resident) “to cause” the corporation (Opco) to redeem the shares of another shareholder (i.e., the shares of a defaulted shareholder). CRA considered that s. 251(5)(b)(ii) would apply even where there was an automatic USA requirement on Opco to redeem shares of a defaulted shareholder (rather than only as required by the non-resident) because the non-resident would have the right to require Opco to do so if it did not fulfill its obligation to do so automatically.