The oppression remedy was created in response to the old common law provision in Foss v. Harbottle which was that the proper plaintiff to wrongs done to a corporation was the corporation itself.
The oppression remedy allows stakeholders (primarily minority shareholders) to become plaintiffs when they are wronged by a company.
For lawyers and claimants this is a highly appealing way to bring a claim as it provides Judges essentially complete control in determining how to remedy the dispute.
This type of claim typically arises where Officers and / or Directors put their hand in the till or take steps to obtain money they are not entitled to.
The Oppression remedy is most commonly a tool used by minority shareholders. However, it may also be used by directors, officers, security holders, creditors, and any other person the court deems proper.
It is important to recognize that just because you meet the definition of complainant under oppression remedy provisions it does not mean the courts will not dismiss it. A common example of this is where rather than bring a claim for “wrongful dismissal” employees (usually senior) attempt to claim oppression against large public companies.
The Oppression Remedy provisions in the Ontario Business Corporations Act can be found in section 248.
A near identical provision can be found in section 241 of the Canada Business Corporations Act.
When you bring an oppression remedy claim which Act you plead will depend on whether it is a provincial or federal corporation.
The Oppression remedy is defined in section 248(2) of the (Ontario) Business Corporations Act as follows:
“Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,
(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;
(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or
(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be 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 of the corporation, the court may make an order to rectify the matters complained of.”
One of the most appealing features of an oppression remedy claim is the scope of equitable remedies available. In essence both the (Ontario) Business Corporations Act and Canada Business Corporations Act provide that Judges can make any order they see fit.
Section 248(3) of the (Ontario) Business Corporations Act provides as follows:
“In connection with an application under this section, the court may make any interim or final order it thinks fit including, without limiting the generality of the foregoing,
(a) an order restraining the conduct complained of;
(b) an order appointing a receiver or receiver-manager;
(c) an order to regulate a corporation’s affairs by amending the articles or by-laws or creating or amending a unanimous shareholder agreement;
(d) an order directing an issue or exchange of securities;
(e) an order appointing directors in place of or in addition to all or any of the directors then in office;
(f) an order directing a corporation, subject to subsection (6), or any other person, to purchase securities of a security holder;
(g) an order directing a corporation, subject to subsection (6), or any other person, to pay to a security holder any part of the money paid by the security holder for securities;
(h) an order varying or setting aside a transaction or contract to which a corporation is a party and compensating the corporation or any other party to the transaction or contract;
(i) an order requiring a corporation, within a time specified by the court, to produce to the court or an interested person financial statements in the form required by section 154 or an accounting in such other form as the court may determine;
(j) an order compensating an aggrieved person;
(k) an order directing rectification of the registers or other records of a corporation under section 250;
(l) an order winding up the corporation under section 207;
(m) an order directing an investigation under Part XIII be made; and
(n) an order requiring the trial of any issue.”
An identical provision can be found in section 241(3) of the Canada Business Corporations Act.
There is a 2-part test in determining whether an Oppression Remedy Claim will succeed. This test was outlined in paragraph 56 of BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560 by the Supreme Court of Canada in simple terms as follows:
In paragraph 59 of BCE Inc. the SCC wrote as follows:
“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.”
Oppression is an equitable remedy and requires a balancing of all the facts. As lawyers we cannot simply rely on past case law and say with certainty that a similar act will automatically be deemed to be oppressive. A complete analysis of the facts in each situation is required. As it is an equitable remedy the clean hands doctrine may be argued in situations where the complainant has also acted unethically or in bad faith.
At paragraph 71 of BCE Inc. the SCC wrote as follows:
“Actual unlawfulness is not required to invoke s. 241; the provision applies where the impugned conduct is wrongful, even if it is not actually unlawful.”
This is important because it means an oppression claim can succeed even in cases where no illegal act has been committed.
The SCC in BCE Inc. at paragraph 62 found that reasonable expectations are objective. An analysis of all the facts is required. There are numerous factors that were identified in BCE Inc. as useful in determining where a reasonable expectation exists.
At paragraph 72 of BCE Inc. the SCC wrote as follows:
“Factors that emerge from the case law that are useful in determining whether a reasonable expectation exists include: general commercial practice; the nature of the corporation; the relationship between the parties; past practice; steps the claimant could have taken to protect itself; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders.”
General Commercial Practice
A departure from general practice is more likely to give rise to an oppression remedy claim if it has the affect of harming or frustrating the complainant’s legal rights.
The Nature of the Corporation
Small closely held corporations are generally granted more latitude then directors of large publicly held corporations.
Relationships
Relationships between family and friends in a closely held private corporation may be governed by different standards than arm length parties.
Preventative Steps
Is there anything the claimant could have done to prevent the harm incurred?
Representations and Agreements
Agreements and representations can be useful in determining the reasonable expectations of the parties.
Fair Resolution of Conflicting Interests
The directors are to act in the best of interests of the corporation. This does not mean that directors must please all stakeholders.
A derivative action allows a complainant to bring a claim on behalf of the corporation in relation to harm / wrong done to the corporation itself.
An oppression remedy claim is a personal remedy available to complainants who have been wronged by a corporation.
The distinction in which is applicable is clearer in large public companies as opposed to small privately held corporations. Often in small privately held corporations there will be significant overlap.
A derivative action requires the courts permission unlike an oppression remedy claim. This is an additional hurdle that is required to be met in a derivative action claim.
The consequences of incorrectly bringing an oppression remedy claim can be fatal to your case. In small, privately held corporations the courts tend to provide more leeway in terms of bringing oppression remedy claims where a derivative action claim may have been applicable. This is in part because there tends to be more overlap of the two than in large public companies.
In Rea v. Wildeboer, 2015 ONCA 373 (CanLII) Justice Blair dismissed an oppression remedy claim against a public company as the wrongs were done solely to the company and not to the complainant’s personal interests. This case involved the misappropriation of funds from a public company.
By contrast in another misappropriation of funds case Malata Group (HK) Limited v. Jung, 2008 ONCA 111 (CanLII) Justice Armstrong allowed the claim to proceed as an oppression remedy claim. Malata is distinguishable because it involved a small closely held corporation in which there were only 3 shareholders. In this case the misappropriation directly affected the complainant because it affected their position as a creditor.
In the recent case of Paul Shaughnessy Investments Inc. v. Drain, 2018 ONSC 1850 (CanLII), the defendant brought a motion for summary judgment on the basis that a derivative action was the proper cause of action. In this case there were 41 shareholders in which 36 were minority shareholders. 4 of the 36 minority shareholders brought a wide variety of claims primarily related to misappropriation of corporate asset / opportunities. Justice Charney dismissed the summary judgment motion and after reviewing several cases summarized his position at paragraph 72 and 73 as follows:
“These cases indicate that the distinction between derivative actions and oppression claims are sharpest when the corporation is both a widely-held and public corporation as in Rea. There is more room for overlap when the corporation is a closely held private corporation as in Malata. Where the corporation is more widely held, the courts insist on more personalized claims, such as a creditor claim, as in Malata, or the wrongful termination claim in Mozas. Where there are only two or three shareholders, there may be no real distinction between a wrong to all shareholders generally and the loss or damage suffered by a particular shareholder, and a dispute between shareholders can be equated to an individualized personal claim. In addition, there is less reason to be concerned with the risk of frivolous lawsuits against the corporation if there are “relatively few shareholders” (Malata, at para. 39).
Moreover, shareholders of public companies, especially widely held ones, have an exit mechanism: they can sell their shares on the public market. Shareholders of private companies (no matter how many shareholders) have no such exit mechanism. Accordingly, the personal interests of a shareholder may be adversely affected in a private company in circumstances that would not qualify as personal in a widely-held public company.”
When determining whether to bring a derivative action claim, oppression remedy claim or other personal claim such as wrongful dismissal it is imperative to hire a lawyer. A lawyer can make the determination based on analyzing all of the facts as to which type of claim should and can be brought. If you incorrectly bring a claim for oppression, then your claim will likely be dismissed and / or unsuccessful. This can lead to significant costs for you as not only is your lawsuit unsuccessful, but you will likely owe the defendant(s) counsel significant amounts of money in a costs award.
Derivative Action: A public company with a total share value in excess of $1 billion has a Director who siphons $25 million in funds from a project involving development of low-income housing. As a result of this theft the share value of the company falls from $18 to $14 per Class A publicly traded share. In this case, a derivative action will likely be appropriate as it is likely that the transaction would affect all shareholders equally.
Oppression Remedy: A public company with a total share value more than $1 billion decides to release additional Class Z shares. Class Z shares previously were a form of executive compensation for the Operations Executive in the company. A large part of this executive’s compensation was formed based on these Class Z shares which were valued at $15 / share. By releasing 10x the previous amount Class Z shares, the Executive who holds 1 million shares sees the value of the shares diluted to $3 / share. This transaction costs the executive almost $12 million. In this case it’s possible that an oppression remedy claim may be available as the claim is personalized. The regular public shareholders were not affected and only a single executive suffered significant losses.
Oppression Remedy: A small private company has 6 shareholders. There are 5 minority shareholders whom as a collective own 49% of the shares. The majority shareholder owns 51% of the shares. After securing an investment of over $2 million from the minority shareholders the majority shareholder begins to unfairly treat 2 of the minority shareholders who voiced concerns. The majority shareholder begins to unilaterally pay himself $50,000 / month as well as $10,000 / month to 3 of the minority shareholders. The other 2 minority shareholders are not provided anything. The majority shareholder then begins to remove significant funds from the company to invest in a separate venture with the 3 minority shareholders he is paying dividends to. In this case an oppression remedy may be an appropriate cause of action depending on all the facts, agreements, contracts etc.
Oppression remedy claims are most often seen in small privately held companies where a majority shareholder begins disregarding or harming the rights of minority shareholders.
One of the things that can often come up in Oppression remedy claims is whether a judgment is collectable as much of the money has been stolen, misused etc.
Directors and Officers can be found personally liable in relation to an oppression remedy claim. Personal liability allows you to collect against the individuals personally held assets which are outside the corporate veil.
The Supreme Court of Canada at Paragraphs 60 and 62 outlined a 2-prong test in Wilson v. Alharayeri, 2017 SCC 39 (CanLII), [2017] 1 SCR 1037 for determining whether Directors should be personally liable for oppressive conduct as follows:
“The first prong of the test for personal liability requires that the oppressive conduct be properly attributable to the director because he or she is implicated in the oppression. (Paragraph 60)
The second prong requires that the imposition of personal liability be fit in all the circumstances.” (Paragraph 62)
In paragraphs 49 to 55 of Wilson the SCC makes clear several factors that should be considered in determining the fitness of personal liability in simple terms as follows:
Section 134(1) of the (Ontario) Business Corporations Act outlines the standard of care / duty of loyalty / fiduciary duty of Directors and Officers as follow:
“134 (1) Every director and officer of a corporation in exercising his or her powers and discharging his or her duties to the corporation shall,
(a) act honestly and in good faith with a view to the best interests of the corporation; and
(b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances”
One thing that must always be considered is that Directors and Officers are not held to a perfect standard. Justice Weiler in Maple Leaf Foods Inc. v. Schneider Corp., 1998 CanLII 5121 (ON CA) makes it clear that Directors and Officers need only make a reasonable decision and not a perfect decision.
When a claim is brought for oppression alleging personal liability against Director(s) / Officer(s) they will often defend the matter on the basis of the business judgment rule. The business judgment rule was clearly outlined by the SCC in Peoples Department Stores Inc. (Trustee of) v. Wise, 2004 SCC 68 (CanLII), [2004] 3 SCR 461 at paragraph 67 as follows:
“Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors or officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.”
If you are a minority shareholder or other claimant that believes your rights are being oppressed or you have been sued for oppression then you should seek the assistance of an oppression remedy lawyer. Contact McMackin Law today.