When a corporation has several shareholders, directors, and officers, it is not difficult to anticipate that disputes between individuals will arise. However, if a shareholder has a complaint concerning conduct within the corporation that is oppressive, they may bring an application asking the court to grant an order under the oppression provisions.
Despite a court’s broad power to allow this remedy and make an accompanying order, the oppression remedy does not resolve every shareholder complaint. The Supreme Court of British Columbia recently considered the limitations of this remedy in a recent decision.
The Oppression Remedy
The oppression remedy is set out in section 227 of the British Columbia Business Corporations Act and is a legal concept based on fairness. The oppression remedy is a mechanism under which shareholders may apply to the court if they believe that the corporation’s affairs are being conducted in an oppressive manner or their interests have been disregarded. It is intended to protect minority shareholders from actions or oppressive conduct that unfairly disregards their legitimate interests in the corporation. However, there are limitations on granting the oppression remedy, including:
- The reasonable expectations of the shareholder;
- Appropriate application of the business judgment rule; and
- The shareholder’s ability to establish their compensable loss.
Upon review of such an application, a court has broad discretion to grant various orders to aid the complaint and resolve the dispute. For example, a court may make an order specifying directions to rectify the situation, ordering the purchase of corporate shares, or any other order the court deems appropriate.
Corporate Reorganization Planned for Company Expansion
In McDougall v. Knutsen, the plaintiffs (Geoffrey McDougall and a company owned by McDougall and his wife) commenced an application resulting from the breakdown in the relationship between three experienced business persons concerning a closely held corporation and the corporate defendant, Cobra Integrated Systems Ltd. (“Cobra Ltd.”).
The three individual parties (one of the plaintiffs and two of the defendants) were the primary shareholders of Cobra Ltd. and had planned for a corporate reorganization to be completed on May 7, 2015 (the “completion date”). The reorganization intended to allow the parties to combine their skill sets and share in the expansion of Cobra Ltd. and its profits.
Shareholders Have Existing Shareholders Agreement
The parties were already parties to a shareholders agreement before the planned reorganization and had determined the same terms would carry forward similarly following the restructuring.
Cobra Ltd. operated a business specializing in alarms, entry phones, remote video access and video surveillance and provided services primarily to developers and managers of large residential and commercial buildings. Before the COVID-19 pandemic, it employed approximately 90 people. By the time of the trial, only around 35 employees remained.
Reorganization Failed to Close for Three Key Reasons
Pursuant to the proposed reorganization, the current value of Cobra Ltd. would be frozen due to the exchange of common shares held by various shareholders for equally valued preferred shares. This allowed for the subscription of common shares at a nominal cost in predetermined percentages. Further, the parties had planned for the reorganization to satisfy the requirements of section 86 of the Income Tax Act so as not to trigger immediate tax consequences.
However, to the parties’ dissatisfaction, the reorganization did not close because:
- A small minority shareholder refused to sign the closing documents one month prior to the anticipated completion date. This triggered the buy-out provision pursuant to the shareholders agreement and litigation, which did not conclude until three years after the expected closing date;
- An updated valuation to ensure that the correct value was frozen was required due to the substantial passage of time; and
- One of the parties was involved in divorce proceedings commenced by their ex-spouse, who obtained an injunction order restraining the disposition of their property until four years beyond the completion date.
Plaintiffs Commence Oppression Proceedings
After the reorganization failed to close, the plaintiffs brought oppression proceedings demanding that the defendants pay $150,000 based on the price freeze of Class A preferred shares. The plaintiffs also sought $1,213,000 for Class A common shares. Due to the reorganization, the plaintiffs had expected both of these requests to occur anyway. Further, they sought damages resulting from the plaintiff’s termination as an employee of Cobra Ltd.
The British Columbia Supreme Court began by referencing the Supreme Court of Canada’s decision in BCE Inc. v. 1976 Debentureholders with respect to the law of oppression, highlighting that “as in any action in equity, wrongful conduct, causation and compensable injury must be established in a claim for oppression.” The Court also noted that the oppression remedy does not replace the business judgment rule, which applies to corporate directors.
Several Incidents of Alleged Oppressive Conduct Cited by Plaintiffs
The plaintiffs alleged several occasions of oppressive conduct by the defendants, including:
- Corporate funds being used to repay a shareholder loan;
- The Failure to agree on “comfort agreement” terms as requested by the plaintiff;
- The decision to use Cobra Ltd. to purchase a timeshare property in Mexico;
- Termination of the individual plaintiff as an employee of Cobra Ltd.; and
- The failure to complete and implement the reorganization.
Upon review of the evidence, the Court found that, despite having a business relationship and common goal, the parties acted so that their interests were protected. Therefore, the plaintiff likely could not have had a reasonable expectation that the parties would agree on the terms of a “comfort agreement,” and failing to do so did not result in oppressive conduct. Additionally, the plaintiff did not suffer a compensable loss due to corporate funds being used to repay a shareholder loan, which was generally normal during business dealings. Further, the termination of the plaintiff’s employment was made in the company’s best interests and was not oppressive.
Timeshare Purchase Breached Plaintiff’s Reasonable Expectations
The Court further declined to find oppressive conduct concerning the failed completion of the reorganization. It was found that the parties had contemplated a failed reorganization from the start, and it is not unusual for this to happen in the commercial realm for various reasons. The defendants had not caused the delay or directly prevented the reorganization from being implemented.
The Court did find that the corporation’s timeshare purchase breached the plaintiff’s reasonable expectations, as this decision was made without holding a board meeting before the purchase. However, the Court applied the business judgment rule to this decision and found that because the plaintiff did not suffer compensable harm, this purchase did not constitute oppressive conduct.
Court Finds No Oppressive Conduct
Overall, the Court declined the plaintiff’s request to grant the oppression remedy in this case as they had not established that they had been oppressed or unfairly prejudiced according to section 227(2) of the Business Corporations Act. However, pertaining to the plaintiff’s employment termination, Cobra Ltd. was ordered to pay Geoff Co. $98,075 in damages for termination without cause or notice.
This case reminds shareholders of the limitations of the oppression remedy, as it does not exist as a mechanism that can remedy a shareholder whenever they believe that they have been aggrieved.
Contact the Corporate Litigation Lawyers at Meridian Law Group in Vancouver for Trusted Representation in Shareholder & Partnership Disputes
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