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Smith Valeriote Lawyers Blog | Smith Valeriote LLP Law Firm Guelph

Director Personal Liability for Oppression of Minority Shareholders

 

Oppression of Minority Shareholders

In a recent case, Wilson v Alharayero, 2017 SCC 39 (“Wilson”), the Supreme Court of Canada affirmed the lower courts’ decisions holding corporate directors personally liable for oppression of minority shareholders. 

The Supreme Court decision is significant in that it clarifies the general criteria governing when corporate directors may have personal liability in cases of shareholder oppression. However, corporate directors will not find specific guidance in the decision as to how to avoid personal liability for oppression claims. Rather, the decision underscores that the finding of personal liability in oppression remedy cases is a context-specific determination which depends on equitable considerations in the specific fact scenario and looks at the commercial realities. 

The general criteria outlined in the decision serve as guidance for courts in applying a suitable remedy in oppression cases and a reminder for corporate directors that the oppression remedy is a flexible one and that courts have discretion in applying this equitable remedy.

The Oppression Remedy

Generally speaking, the oppression remedy is a personal remedy available under corporate statutes to shareholders of a corporation in instances where the corporation or the board of directors of the corporation have acted in a way which is oppressive, unfairly prejudicial to or which unfairly disregards the shareholder’s interests. The oppression remedy is found in Section 241 of the Canada Business Corporations Act (“CBCA”) and Section 248 of the Business Corporations Act (Ontario) (“OBCA”).

Wilson

In Wilson, the corporation issued a private placement of convertible secured notes to its existing common shareholders. Prior to the private placement, the corporation accelerated the conversion of the Class C convertible preferred shares held by the President and CEO into common shares despite doubt as to whether the corporation met the solvency test it was required to meet in order to effect the conversion. 

The complainant’s Class A and B convertible preferred shares were not converted into common shares and, as a result, the complainant was not able to participate in the private placement issued to common shareholders. Ultimately the complainant’s shareholdings were diluted because the complainant was not afforded the opportunity to participate in the private placement, yet the President and CEO was. The complainant filed an application for oppression against the directors of the corporation.

Judge's Decision

The trial judge granted the application in part against certain directors and found the President and CEO and the chairperson of the audit committee personally liable – they used their influence as the only members of the audit committee to refuse to convert the complainant’s shares and failed to ensure that the complainant shareholder was not unfairly prejudiced by the private placement. 

Appeal

The Court of Appeal dismissed the appeal by the directors. One of the directors appealed to the Supreme Court challenging the conclusion that the director should be held personally liable for the oppressive conduct.

Supreme Court Ruling

The issue before the Supreme Court was when corporate directors may be found personally liable for oppressive conduct. The Supreme Court identified four general principles that should guide a court in determining a “fit” or suitable remedy under Section 241(3) of the CBCA (equivalent to Section 248 of the OBCA):

  1. The oppression remedy must in itself be a fair way of dealing with the situation. (It may – but will not always – be fair to hold a director personally liable, i.e. where he or she has derived a personal benefit from the oppressive conduct, if they have increased their own control of the corporation, or breached a personal duty).

  2. Any order should go no further than necessary to rectify the oppression. (The purpose of the remedy is to correct the injustice and not to over-compensate the complainant).

  3. Any order may serve only to vindicate the reasonable expectations of shareholders, creditors, directors or officers in their capacity as stakeholders in the corporation. (Additional or heightened expectations arising out of family or personal relationships are not protected).

  4. A court should consider the general corporate law context in exercising its remedial discretion. (In applying the oppression remedy, the court should consider other remedies available under statute or common law and other remedies may be more appropriate in the circumstances).

Overall, the guidelines in Wilson underline the flexible and discretionary approach of the courts in oppression remedy cases. Corporate directors should be aware of the potential for personal liability for oppressive conduct and, as always, take care to fulfill their directorial duties.

Should you require further information on this topic please contact one of the lawyers in our business law group.

The content of this article is intended to provide a general guide to the subject matter and is not legal advice. Specialist advice should be sought regarding your specific circumstance.

Date:
2017.08.15

Services:
Business Law

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Phone: 519 837 2100
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Email: guelphinfo@smithvaleriote.com

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Fergus, ON N1M 1T7

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