Anonymised, illustrative composite. Getting the cap table right in an Ontario pharmacy corporation earns nothing if the board is wrong. The share test and the director test are two independent conditions, and satisfying one has no bearing on the other.
At a glance
The investor had done this once before and believed it had learned the lesson. On its first Ontario pharmacy deal it had discovered the per-class share test the hard way and rebuilt the cap table to 49% of everything. On this one — five stores, $14,800,000, two founding pharmacists and a third pharmacist shareholder who wanted out — it arrived with a compliant share structure and a governance package copied from its non-regulated portfolio: three of five board seats, the right to appoint the chair, and a casting vote in the chair.
The share test lives in s.142(2) of the Drug and Pharmacies Regulation Act. The director test lives one subsection above it, in s.142(1), and says: “No corporation shall own or operate a pharmacy unless the majority of the directors of the corporation are pharmacists.”
Two independent conditions, both prefaced with the same prohibition. A corporation must satisfy both. Three of five seats held by nominees of a non-pharmacist investor means a majority of the directors are not pharmacists, and the corporation therefore may not own or operate the pharmacy — regardless of a cap table that would satisfy any regulator reading s.142(2) alone.
The two subsections together do something a shareholders' agreement cannot undo by drafting. Economics may go to the investor up to 49% of every class; control of the board may not go to the investor at all. Those are the same negotiation in an unregulated deal and two different negotiations here.
The investor's model assumed board control was worth about 90 basis points on the exit multiple, on the theory that it could force a sale process and standardise operations across the five sites. The two founders' counter was that the price already reflected a business the founders would keep running. The seats were, in commercial terms, worth roughly $1,300,000 of argument on a $14,800,000 deal.
There was a second, more concrete number. The third pharmacist shareholder was selling 18% of the common and 18% of the preferred. That block had to go somewhere that kept a majority of each class registered in pharmacists' names, so it went to the two founders, financed by a vendor note — which had the incidental effect of making the founders' board majority durable rather than contractual.
The buyer's first instinct was to keep the seats and hollow them out: a unanimous shareholder agreement restricting the directors' powers, so that the board's composition became formal rather than substantive. Business Corporations Act s.108(2) does permit that mechanism — “A written agreement among all the shareholders of a corporation or among all the shareholders and one or more persons who are not shareholders may restrict in whole or in part the powers of the directors to manage or supervise the management of the business and affairs of the corporation.”
But look at what s.142(1) actually counts. It counts the directors, not their powers. Restricting what a board may do does not change who sits on it, and the subsection asks only whether the majority of the directors are pharmacists. Shifting the powers to a shareholder body in which the investor holds 49% and a veto does not cure a board on which three of five are not pharmacists; it leaves the same board in place with less to do.
The remedy that does work runs in the opposite direction. Take fewer seats and take the protections as shareholder-level rights, where the statute imposes only the 49% per-class ceiling and says nothing about how those 49% may vote. That is why the two subsections are worth separating in your head: shares can be recut, and a share failure is fixable by moving stock. A board failure is not fixable by drafting, because there is no drafting device that makes a non-pharmacist director a pharmacist.
Two further provisions shaped the final documents. Section 143 disqualifies a person whose certificate of registration has been revoked for cause, or is suspended for cause, from acting as a director or voting as a shareholder in a corporation operating a pharmacy — so the pharmacist directors are themselves conditional. And s.166(2) provides that where a pharmacy is operated contrary to the Act, “the owner and designated manager of such pharmacy, or either of them, or any director of a corporation operating a pharmacy, may be proceeded against, and prosecution or conviction of any of them is not a bar to prosecution or conviction of another.” A board seat in this sector carries personal exposure that the investor's standard directors' package had not been priced against.
The investor took two of five seats. The control package moved wholesale to the shareholder level: a fourteen-item reserved-matters list — new indebtedness above a threshold, sale or closure of a store, changes to the designated manager arrangements at any site, related-party transactions, budget approval, any new share issuance — each requiring 75% shareholder approval, which the investor's 49% blocks. See board composition after an investment for the general shape of that trade.
The founders kept three seats and, after buying the departing shareholder's block, a durable majority of each class. The investor gave up the ability to force an outcome and kept the ability to prevent one. On the exit-multiple argument it conceded roughly $700,000 of the $1,300,000 it had put on board control.
The corporation would have been operating five pharmacies in breach of s.142(1), which engages s.144(1) — the corporation is not a person permitted to own or operate a pharmacy — and puts every store's certificate of accreditation in front of the Accreditation Committee. On the individual side, s.166(2) makes each director prosecutable, and prosecution of one is no bar to prosecution of another.
The tell was a governance term sheet that had been reused. The share structure had been redrawn from first principles because the last deal had taught that lesson; the board structure had been copied from a manufacturing investment. When a statute imposes two conditions, learning the first one is not progress on the second, and a term sheet that is half bespoke and half boilerplate is a term sheet where nobody has re-read the section.
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