Oppression remedy

Last updated

In corporate law in Commonwealth countries, an oppression remedy is a statutory right available to oppressed shareholders. It empowers the shareholders to bring an action against the corporation in which they own shares when the conduct of the company has an effect that is oppressive, unfairly prejudicial, or unfairly disregards the interests of a shareholder. It was introduced in response to Foss v Harbottle , which had held that where a company's actions were ratified by a majority of the shareholders, the courts will not generally interfere.

Contents

It has been widely copied in companies legislation throughout the Commonwealth, including:

The Companies Ordinance of Hong Kong also contains similar provisions. [7]

Introduction in the United Kingdom

An oppression remedy, intended to operate as an alternative to winding up a company, was adopted as s. 210 of the Companies Act 1948 , [8] which declared:

210. (1) Any member of a company who complains that the affairs of the company are being conducted in a manner oppressive to some part of the members (including himself) or, in a case falling within [s. 169(3)], the Board of Trade, may make an application to the court by petition for an order under this section.

(2) If on any such petition the court is of opinion—
(a) that the company's affairs are being conducted as aforesaid; and
(b) that to wind up the company would unfairly prejudice that part of the members, but otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up;
the court may, with a view to bringing to an end the matters complained of, make such order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise.

In the Companies Act 2006 , the relevant provision is expressed in s. 994 (and the Secretary of State has similar authority under s. 995):

994. (1) A member of a company may apply to the court by petition for an order under this Part on the ground—

(a) that the company's affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least himself), or
(b) that an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial.

Conduct that is considered to constitute "unfair prejudice" has been given a broad interpretation, which can include: [9]

  • exclusion from management in circumstances where there is a legitimate expectation of participation;
  • the diversion of business to another company in which the majority shareholder holds an interest;
  • the awarding by the majority shareholder to himself of excessive financial benefits; and
  • abuses of power and breaches of the Articles of Association.

The conduct is not confined to a specific group. In Re HR Harmer Ltd, Jenkins LJ noted that the definition is "wide enough to cover oppression by anyone who is taking part in the conduct of the affairs of the company whether de facto or de jure ." [10] Therefore, it can cover the actions of:

  • directors,
  • a controlling shareholder,
  • persons with de facto control of the company,
  • a class of shareholders, or
  • conduct of a related company. [11]

Application in Canada

Provisions similar to s. 210 of the 1948 UK Act were first introduced into Canadian law through the 1975 passage of the Canada Business Corporations Act . [12] It incorporated recommendations made in 1962 by the UK Jenkins Committee on Company Law for removing the linkage of the remedy with that of winding-up and for broadening its scope. [13] Canadian legislation (both federally and in all provinces) provides for a broad approach to the oppression remedy (French : recours en oppression). In Peoples Department Stores Inc. (Trustee of) v. Wise , the Supreme Court of Canada noted:

48. ...The oppression remedy of s. 241(2)(c) of the CBCA and the similar provisions of provincial legislation regarding corporations grant the broadest rights to creditors of any common law jurisdiction. [14] One commentator describes the oppression remedy as “the broadest, most comprehensive and most open-ended shareholder remedy in the common law world.” [15]

A "complainant" is deemed to be a current or former registered security holder, a current or former director or officer, the Director appointed under the CBCA, or "any other person who, in the discretion of a court, is a proper person to make an application under this Part." [16] In that regard, it can include a creditor of the corporation (but not every creditor will qualify), [17] as well as a trustee appointed under the Bankruptcy and Insolvency Act or a monitor appointed under the Companies' Creditors Arrangement Act . [18]

As in the United Kingdom, oppressive conduct is not restricted to that committed by corporations. In the case of corporate directors, the Supreme Court of Canada in 2017 held that they can be held personally liable for such conduct, but only where:

  1. the oppression remedy request is a fair way of dealing with the situation;
  2. any order made under s. 241(3) should go no further than necessary to rectify the oppression; and
  3. any such order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders; but
  4. director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances. [19]

Applications to the Court have been successful where: [20]

  1. there was lack of a valid corporate purpose for the transaction;
  2. the corporate and its controlling shareholders failed to take reasonable steps to simulate an arm's length transaction;
  3. there was lack of good faith on the part of the corporation's directors;
  4. there was discrimination among shareholders which benefited the majority to the exclusion of the minority;
  5. there was a lack of adequate and appropriate disclosure of material information to minority shareholders; and
  6. there was a plan to eliminate a minority shareholder.

The court's discretion is not unlimited, as the Court of Appeal of Newfoundland and Labrador observed in 2003: [21]

  • The result of the exercise of the discretion contained in subsection 371(3) [22] must be the rectification of the oppressive conduct. If it has some other result the remedy would be one which is not authorized by law.
  • Any rectification of a matter complained of can only be made with respect to the person’s interest as a shareholder, creditor, director or officer.
  • Persons who are shareholders, officers and directors of companies may have other personal interests which are intimately connected to a transaction. However, it is only their interests as shareholder, officer or director as such which are protected by section 371 of the Act. [23] The provisions of that section cannot be used to protect or to advance directly or indirectly their other personal interests.
  • The law is clear that when determining whether there has been oppression of a minority shareholder, the court must determine what the reasonable expectations of that person were according to the arrangements which existed between the principals.
  • They must be expectations which could be said to have been, or ought to have been, considered as part of the compact of the shareholders.
  • The determination of reasonable expectations will also[...] have an important bearing upon the decision as to what is a just remedy in a particular case.
  • The remedy must not be unjust to the others involved.

Oppression claims are separate from derivative actions, but the two are not mutually exclusive. [24] However, a derivative action claim can only be instituted by leave of the court, as it is brought by a complainant to sue on behalf of the corporation for a wrong done to the corporation, and any successful claim is binding on all shareholders. This is in contrast to the oppression remedy claim, where a complainant sues on behalf of himself for a wrong he suffers personally as a result of corporate conduct. [25]

Application in Australia

S. 234 of the Corporations Act 2001 provides that the following can apply for an order seeking relief for oppressive conduct:

  • a member of the company, on behalf of himself or another member,
  • a person who has been removed from the register of members, or has ceased to be a member under circumstances which are the substance of the application,
  • a person to whom a share in the company has been transmitted by will or by operation of law, or
  • any other person, with the consent of the Australian Securities and Investments Commission, in connection to a current or prior investigation into the company conducted by ASIC.

S. 232 states that the conduct of the company's affairs, an actual or proposed act or omission by or on behalf of a company, or a resolution or proposed resolution by all, or by a class, of the shareholders, must be:

  • contrary to the interests of the shareholders as a whole; or
  • oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a shareholder or shareholders whether in that capacity or in any other capacity,

in order for an application to be considered. [26]

The oppression remedy, together with the option available for winding up a company and ASIC's use of the public interest ground in that regard, has received greater exposure and legal development since the onset of the global financial crisis. [27]

Related Research Articles

<span class="mw-page-title-main">Liquidation</span> Winding-up of a company

Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.

<span class="mw-page-title-main">Corporate law</span> Body of law that governs businesses

Corporate law is the body of law governing the rights, relations, and conduct of persons, companies, organizations and businesses. The term refers to the legal practice of law relating to corporations, or to the theory of corporations. Corporate law often describes the law relating to matters which derive directly from the life-cycle of a corporation. It thus encompasses the formation, funding, governance, and death of a corporation.

<span class="mw-page-title-main">Insolvency</span> State of being unable to pay ones debts

In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.

<span class="mw-page-title-main">United Kingdom company law</span> Law that regulates corporations formed under the Companies Act 2006

The United Kingdom company law regulates corporations formed under the Companies Act 2006. Also governed by the Insolvency Act 1986, the UK Corporate Governance Code, European Union Directives and court cases, the company is the primary legal vehicle to organise and run business. Tracing their modern history to the late Industrial Revolution, public companies now employ more people and generate more of wealth in the United Kingdom economy than any other form of organisation. The United Kingdom was the first country to draft modern corporation statutes, where through a simple registration procedure any investors could incorporate, limit liability to their commercial creditors in the event of business insolvency, and where management was delegated to a centralised board of directors. An influential model within Europe, the Commonwealth and as an international standard setter, UK law has always given people broad freedom to design the internal company rules, so long as the mandatory minimum rights of investors under its legislation are complied with.

Unfair prejudice in United Kingdom, company law is a statutory form of action that may be brought by aggrieved shareholders against their company. Under the Companies Act 2006 the relevant provision is s 994, the identical successor to s 459 Companies Act 1985. Unfair prejudice actions have generated an enormous body of cases, many of which are called "Re A Company", with only a six-digit number and report citation to distinguish them. They have become a substitute for the more restrictive conditions on a "derivative action", as an exception to the rule in Foss v Harbottle. Though not restricted in such a way, unfair prejudice claims are primarily brought in smaller, non-public companies. This is the text from the Act.

s 994 Petition by company member

(1) A member of a company may apply to the court by petition for an order under this Part on the ground—

(2) The provisions of this Part apply to a person who is not a member of a company but to whom shares in the company have been transferred or transmitted by operation of law, as they apply to a member of a company.

(3) In this section, and so far as applicable for the purposes of this section in the other provisions of this Part, "company" means—

<i>Scottish Co-op Wholesale Society Ltd v Meyer</i>

Scottish Co-operative Wholesale Society Ltd v Meyer [1959] AC 324 is a UK company law case, concerning the predecessor of the unfair prejudice provision, an action for "oppression" under section 210 of the Companies Act 1948.

Directors' duties are a series of statutory, common law and equitable obligations owed primarily by members of the board of directors to the corporation that employs them. It is a central part of corporate law and corporate governance. Directors' duties are analogous to duties owed by trustees to beneficiaries, and by agents to principals.

<span class="mw-page-title-main">Examinership</span> Process in Irish law

Examinership is a process in Irish law whereby the protection of the Court is obtained to assist the survival of a company. It allows a company to restructure with the approval of the High Court.

Shareholder oppression occurs when the majority shareholders in a corporation take action that unfairly prejudices the minority. It most commonly occurs in non-publicly traded companies, because the lack of a public market for shares leaves minority shareholders particularly vulnerable, since minority shareholders cannot escape mistreatment by selling their stock and exiting the corporation. The majority shareholders may harm the economic interests of the minority by refusing to declare dividends or attempting a squeezeout. The majority may physically lock the minority out of the corporate premises and even deny the minority the right to inspect corporate records and books, making it necessary for the minority to sue every time it wants to look at them. An important concept in law pertaining to shareholder oppression is the "reasonable expectations" of the minority shareholder. The "fair dealing" standard is also sometimes used by courts.

<span class="mw-page-title-main">Commercial insolvency in Canada</span> Business insolvency in Canada

Commercial insolvency in Canada has options and procedures that are distinct from those available in consumer insolvency proceedings. It is governed by the following statutes:

<span class="mw-page-title-main">Canadian corporate law</span>

Canadian corporate law concerns the operation of corporations in Canada, which can be established under either federal or provincial authority.

<i>BCE Inc v 1976 Debentureholders</i> Supreme Court of Canada case

BCE Inc v 1976 Debentureholders, 2008 SCC 69 (CanLII), [2008] 3 SCR 560 is a leading decision of the Supreme Court of Canada on the nature of the duties of corporate directors to act in the best interests of the corporation, "viewed as a good corporate citizen". This case introduced the principle of fair treatment as an organizing principle in Canadian corporate law.

<span class="mw-page-title-main">British Virgin Islands company law</span>

The British Virgin Islands company law is the law that governs businesses registered in the British Virgin Islands. It is primarily codified through the BVI Business Companies Act, 2004, and to a lesser extent by the Insolvency Act, 2003 and by the Securities and Investment Business Act, 2010. The British Virgin Islands has approximately 30 registered companies per head of population, which is likely the highest ratio of any country in the world. Annual company registration fees provide a significant part of Government revenue in the British Virgin Islands, which accounts for the comparative lack of other taxation. This might explain why company law forms a much more prominent part of the law of the British Virgin Islands when compared to countries of similar size.

<span class="mw-page-title-main">Cayman Islands company law</span> National economic law

Cayman Islands company law is primarily codified in the Companies Law and the Limited Liability Companies Law, 2016, and to a lesser extent in the Securities and Investment Business Law. The Cayman Islands is a leading offshore financial centre, and financial services form a significant part of the economy of the Cayman Islands. Accordingly company law forms a much more prominent part of the law of the Cayman Islands than might otherwise be expected.

<span class="mw-page-title-main">Cayman Islands bankruptcy law</span>

Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:

Australian insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is principally governed by the Corporations Act 2001. Under Australian law, the term insolvency is usually used with reference to companies, and bankruptcy is used in relation to individuals. Insolvency law in Australia tries to seek an equitable balance between the competing interests of debtors, creditors and the wider community when debtors are unable to meet their financial obligations. The aim of the legislative provisions is to provide:

Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.

<span class="mw-page-title-main">Hong Kong insolvency law</span> Financial regulation in Hong Kong

Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.

<i>Wilson v Alharayeri</i> Supreme Court of Canada case

Wilson v Alharayeri is a leading case of the Supreme Court of Canada which significantly extends the application of the oppression remedy under the Canada Business Corporations Act to include non-corporate parties.

The oppression remedy in Canadian corporate law is a powerful tool available in Canadian courts, unique in breadth and scope compared to other examples of the oppression remedy found elsewhere in the world.

References

  1. ↑ Canada Business Corporations Act , R.S.C. 1985, c. C-44, s. 241
  2. ↑ "Corporations Act 2001". Part 2F.1, No. 50 of 2001.
  3. ↑ "Companies Act 1993". ss. 174-176, No. 105 of 1993.
  4. ↑ "Companies Act, 2008". s. 163, No. 71 of 2008.
  5. ↑ "Companies Act". s. 216, No. 42 of 1967.
  6. ↑ "Companies Act 1965". s. 181, No. 125 of 1965.
  7. ↑ Part 14, Cap. No. 622 of 2014.
  8. ↑ Now "Part 30". of the Companies Act 2006
  9. ↑ Anthony Lee (1 November 2012). "Guide to Unfair Prejudice Against Shareholders". Ashfords. Retrieved 3 July 2013.
  10. ↑ [1959] 1 WLR 62 at 75
  11. ↑ Roman Tomasic; Stephen Bottomley; Rob McQueen (2002). Corporations Law in Australia (2nd ed.). Annandale, NSW: Federation Press. p. 414. ISBN   1-86287-314-3.
  12. ↑ Canada Business Corporations Act , S.C. 1974-76, c. 33, s. 234
  13. ↑ Dickerson, Robert W.V.; Howard, John L.; Getz, Leon (1971). Proposals for a New Business Corporations Law for Canada (PDF). Vol. I. Ottawa: Information Canada. par. 485-486, at pp. 162-164.; 1971 draft s. 19.04 shown at Dickerson, Robert W.V.; Howard, John L.; Getz, Leon (1971). Proposals for a New Business Corporations Law for Canada (PDF). Vol. II. Ottawa: Information Canada. pp. 175–177.
  14. ↑ D. Thomson (2000). "Directors, Creditors and Insolvency: A Fiduciary Duty or a Duty Not to Oppress?" (PDF). University of Toronto Faculty of Law Review. 58 (1): 48.[ permanent dead link ]
  15. ↑ Beck, Stanley M. (1982). "Minority Shareholders' Rights in the 1980s". Corporate Law in the 80s, Special Lectures of the Law Society of Upper Canada. Don Mills: Richard De Boo. p. 312. ISBN   0-88820110-9.
  16. ↑ Canada Business Corporations Act , R.S.C. 1985, c. C-44, s. 238
  17. ↑ Frank Roberts (2000). "Creditor's use of the oppression remedy". McGill University . Retrieved 2 July 2013.
  18. ↑ Ernst & Young Inc v Essar Global Fund Ltd et al, 2017 ONSC 1366 at par. 36-37(6 March 2017)
  19. ↑ O'Brien, Kevin; Carson, Robert; Malik, Waleed (July 13, 2017). "Supreme Court clarifies test for personal liability of directors for oppressive conduct". Osler, Hoskin & Harcourt., discussing Wilson v Alharayeri , 2017 SCC 39 at par. 47-55(13 July 2017)
  20. ↑ Ben-Ishai & Puri 2004, p. 89.
  21. ↑ Pelley v. Pelley, 2003 NLCA 6 at par. 37, 221 Nfld & PEIR 1(22 January 2003), Court of Appeal (Newfoundland & Labrador,Canada)
  22. ↑ of NLCA, equivalent to CBCA, s. 241(3)
  23. ↑ NLCA
  24. ↑ T. Mark Pontin; Tracey M. Cohen; Graeme Cooper (June 2011). "Distinguishing Oppression Claims and Derivative Actions" (PDF). Fasken Martineau. Archived from the original (PDF) on 2013-12-15. Retrieved 2 July 2013.
  25. ↑ Koshal, Anu (June 10, 2015). "Pick Your Poison: the Court of Appeal Clarifies the Distinction between the Oppression Remedy and the Derivative Action". McCarthy Tétrault., discussing Rea v Wildeboer, 2015 ONCA 373 , 126 OR (3d) 178(26 May 2015)
  26. ↑ "Statutory Oppression Remedy under the Corporations Act 2001 (Cth)". Aherns.
  27. ↑ Michael Legg; Louisa Travers (2011). "Oppression and winding up remedies after the GFC". Company and Securities Law Journal . 29 (2): 101–114.

Further reading

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.