Oppression remedy in Canadian corporate law

Last updated

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.

Contents

Origin

Provisions similar to s. 210 of the UK Companies Act 1948 were first introduced into Canadian law through the 1975 passage of the Canada Business Corporations Act . [1] 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. [2] Most provinces later adopted similar provisions.

Scope

Canadian legislation (both federally and in all provinces) [lower-alpha 1] 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. [5] One commentator describes the oppression remedy as “the broadest, most comprehensive and most open-ended shareholder remedy in the common law world.” [6]

In the CBCA, s. 241 states: [7]

241. (1) A complainant may apply to a court for an order under this section.

(2) If, on 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 a result,
(b) the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner, or
(c) the powers of the directors of the corporation or any of its affiliates are or have been 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, the court may make an order to rectify the matters complained of.
(3) 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 a security holder any part of the monies that the security holder paid 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 155 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 243;
(l) an order liquidating and dissolving the corporation;
(m) an order directing an investigation under Part XIX to be made; and
(n) an order requiring the trial of any issue.

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." [8] In that regard, it can include a creditor of the corporation (but not every creditor will qualify), [9] as well as a trustee appointed under the Bankruptcy and Insolvency Act or (in some circumstances) [10] a monitor appointed under the Companies' Creditors Arrangement Act . [11]

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. [12]

Jurisprudence

In BCE Inc v 1976 Debentureholders , the Supreme Court of Canada stated that, in assessing a claim of oppression, a court must answer two questions: [13]

  • Does the evidence support the reasonable expectation asserted by the claimant? and
  • Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?

Where conflicting interests arise, it falls to the directors of the corporation to resolve them in accordance with their fiduciary duty. [14] This is defined as a "tripartite fiduciary duty", composed of (1) an overarching duty to the corporation, which contains two component duties — (2) a duty to protect shareholder interests from harm, and (3) a procedural duty of "fair treatment" for relevant stakeholder interests. This tripartite structure encapsulates the duty of directors to act in the "best interests of the corporation, viewed as a good corporate citizen". [15] Following BCE, the Court of Appeal of British Columbia noted that "breach of fiduciary duty ... 'may assist in characterizing particular conduct as tending as well to be 'oppressive', 'unfair', or 'prejudicial'". [16] More recently, scholarly literature has clarified the connection between the oppression remedy and the fiduciary duty in Canadian law:

Upholding the reasonable expectations of corporate constituents is the cornerstone of the oppression remedy. Establishing a breach of the tripartite fiduciary duty has the effect of raising a presumption of conduct contrary to the reasonable expectations of a complainant. [17]

Under the business judgment rule, deference should be accorded to the business decisions of directors acting in good faith in performing the functions they were elected to perform. [18]

Extent of application

Applications to the Court have been successful where: [19]

  1. there was lack of a valid corporate purpose for the transaction;
  2. the corporation 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 types of behaviour that such actions encompass have included the diversion of corporate profits, the personal use of such profits by a controlling shareholder, the exclusion of the applicant from the corporation's operations, and changing the proportionate holdings by different shareholders. [20]

The remedy can extend to a wide variety of scenarios:

  • It can be potentially used by any stakeholder to deal with any type of unfair conduct by a corporation [21]
  • It can cover an affiliate not incorporated under the same Act [22]
  • It has been used to enforce unpaid judgments against the corporation's directors, where the corporation had been subject to asset stripping [23]
  • It has also been used in conjunction with other remedies including the threatened winding up of a company by the court in order to resolve shareholder disputes in closely held companies. [24]
  • The Crown has employed the oppression remedy in its status as a creditor under the Income Tax Act, in order to set aside dividend payments that rendered a corporation unable to pay its tax liability. [25] [26]
  • Where a company has made excessive salary payments to a controlling shareholder, a judgment creditor has been permitted to be a complainant. [25] [27]
  • A wrongfully dismissed employee can make a claim in order to thwart a corporation from conducting asset stripping in order to make itself judgment proof. [25] [28] The remedy has also been extended to scenarios where such a dismissal has been followed by directors ceasing operations and migrating to a phoenix company. [29]
  • Where representations have been made by officers of a parent corporation to an officer of a subsidiary about the terms of a stock option plan, such representations may create a reasonable expectation and give rise to an oppression remedy complaint if they are subsequently breached. [30]
  • Where a controlling shareholder engaged in asset stripping in breach of his fiduciary duty to the corporation, an order was made for his removal as a director and officer, the mandatory redemption of the shares he controlled and of a shareholder loan due to him, and his removal as a trustee from a trust controlling other shares in the corporation. [31]

The court's discretion is not unlimited, as the Court of Appeal of Newfoundland and Labrador observed in 2003: [32]

  • The result of the exercise of the discretion contained in subsection 371(3) [33] 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. [34] 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.

Comparison with derivative actions

Oppression claims are separate from derivative actions, but the two are not mutually exclusive. [35] 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. [36]

In 2015, the Ontario Court of Appeal dismissed an oppression remedy claim, because the claimant was only seeking recovery of funds for the benefit of the corporation. As a result of the discussion within the judgment, the following general principles can be drawn for determining which remedy is more appropriate: [36]

  1. To claim oppression, a plaintiff must plead that they suffered personal harm distinct from that suffered by the corporation itself.
  2. The focus of the oppression remedy is on the effects of the impugned conduct on the complainant, not on the corporation.
  3. If the relief sought is for the benefit of the corporation, then the action will most likely have to be brought as a derivative action, and leave will be required.
  4. The causes of action overlap where the corporation is small and closely held, and where the impugned conduct directly affects the complainant in a way that differs from the effects on other shareholders. In such cases, a claim may be brought either as a derivative action or a claim for oppression.

Further reading

Notes

  1. Prince Edward Island was the last jurisdiction to introduce the remedy when its corporate law reform came into effect on May 3, 2019, [3] subject to a three-year transitional period for present PEI companies to apply for continuance under the new Act [4]

Related Research Articles

<span class="mw-page-title-main">Fiduciary</span> Person who holds a legal or ethical relationship of trust

A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for example, a corporate trust company or the trust department of a bank, acts in a fiduciary capacity to another party, who, for example, has entrusted funds to the fiduciary for safekeeping or investment. Likewise, financial advisers, financial planners, and asset managers, including managers of pension plans, endowments, and other tax-exempt assets, are considered fiduciaries under applicable statutes and laws. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice, or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.

A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.

<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.

<i>Bankruptcy and Insolvency Act</i>

The Bankruptcy and Insolvency Act is one of the statutes that regulates the law on bankruptcy and insolvency in Canada. It governs bankruptcies, consumer and commercial proposals, and receiverships in Canada.

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.

<i>Peoples Department Stores Inc (Trustee of) v Wise</i> Supreme Court of Canada case

Peoples Department Stores Inc v Wise, 2004 SCC 68 is a major Supreme Court of Canada decision on the scope of the fiduciary duty upon directors and officers of a corporation. When examining the duty of directors under section 122(1) of the Canada Business Corporations Act ("CBCA"), the Court held that there is a distinction between the interests of the corporation and those of the stakeholders and creditors.

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">United States corporate law</span> Overview of United States corporate law

United States corporate law regulates the governance, finance and power of corporations in US law. Every state and territory has its own basic corporate code, while federal law creates minimum standards for trade in company shares and governance rights, found mostly in the Securities Act of 1933 and the Securities and Exchange Act of 1934, as amended by laws like the Sarbanes–Oxley Act of 2002 and the Dodd–Frank Wall Street Reform and Consumer Protection Act. The US Constitution was interpreted by the US Supreme Court to allow corporations to incorporate in the state of their choice, regardless of where their headquarters are. Over the 20th century, most major corporations incorporated under the Delaware General Corporation Law, which offered lower corporate taxes, fewer shareholder rights against directors, and developed a specialized court and legal profession. Nevada has done the same. Twenty-four states follow the Model Business Corporation Act, while New York and California are important due to their size.

<i>Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc.</i>

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, was a landmark decision of the Delaware Supreme Court on hostile takeovers.

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.

<i>Pilmer v Duke Group Ltd (in liq)</i> Judgement of the High Court of Australia

Pilmer v Duke Group Ltd is an Australian company law case concerning the adequacy of consideration paid for shares, as well as on the questions of duty of care and fiduciary duty owed by experts retained in such matters.

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

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:

<i>Sun Indalex Finance, LLC v United Steelworkers</i> Supreme Court of Canada case

Sun Indalex Finance, LLC v United Steelworkers, 2013 SCC 6, arising from the Ontario courts as Re Indalex Limited, is a decision of the Supreme Court of Canada that deals with the question of priorities of claims in proceedings under the Companies' Creditors Arrangement Act, and how they intersect with the fiduciary duties employers have as administrators of pension plans.

<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>Oldham v Kyrris</i>

Oldham v Kyrris[2003] EWCA Civ 1506 is a UK insolvency law case concerning the administration procedure when a company is unable to repay its debts.

<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.

<i>Southcott Estates Inc v Toronto Catholic District School Board</i> Supreme Court of Canada case

Southcott Estates Inc v Toronto Catholic District School Board, 2012 SCC 51, [2012] 2 SCR 675, is a landmark case of the Supreme Court of Canada in the area of commercial law, with significant impact in the areas of:

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

Wilson v Alharayeri, 2017 SCC 39 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.

<i>Deloitte & Touche v Livent Inc (Receiver of)</i> Supreme Court of Canada case

Deloitte & Touche v Livent Inc , 2017 SCC 63 is a leading case of the Supreme Court of Canada concerning the duty of care that auditors have toward their clients during the course of a professional engagement.

References

  1. Canada Business Corporations Act , S.C. 1974-76, c. 33, s. 234
  2. 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.
  3. "Proclamation" (PDF). Royal Gazette. 145 (12): 319. March 23, 2019.
  4. Business Corporations Act , RSPEI 2018, c. B-6.01, s. 235
  5. 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 ]
  6. 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.
  7. Canada Business Corporations Act , R.S.C. 1985, c. C-44, s. 241
  8. Canada Business Corporations Act , R.S.C. 1985, c. C-44, s. 238
  9. Roberts, Frank (2000). Creditor's use of the oppression remedy (LLM). McGill University. ISBN   0-612-64274-7.
  10. Graff, Steven L.; van Zandvoort, Mark; Jones, Timothy (February 1, 2018). "When Can a CCAA Monitor Bring an Oppression Claim Against a Stakeholder?". Aird & Berlis., discussing Ernst & Young Inc v Essar Global Fund Ltd et al, 2017 ONSC 1366 (6 March 2017) and Re Urbancorp Cumberland 2 GP Inc, 2017 ONSC 7649 (20 December 2017)
  11. Essar Global, par. 36-37
  12. 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)
  13. BCE Inc., par. 68
  14. BCE Inc., par. 81-84
  15. Rojas 2014, p. 61.
  16. Icahn Partners LP v Lions Gate Entertainment Corp., 2011 BCCA 228 at par. 71, 333 DLR(4th) 257(10 May 2011)
  17. Rojas 2014, p. 84.
  18. BCE Inc., par. 99-100
  19. Ben-Ishai & Puri 2004, p. 89.
  20. Ben-Ishai & Puri 2004, pp. 89–90.
  21. "The Oppression Remedy in Canada". McMillan LLP. July 2009. Retrieved 2 July 2013.
  22. Robert D. Chapman; Edward P. Kerwin (28 August 2008). "CBCA Oppression Remedy Extends to Non-CBCA Affiliate". McCarthy Tétrault. Archived from the original on 2013-12-13. Retrieved 2 July 2013., discussing Manufacturers Life Insurance Company v. AFG Industries Ltd., 2008 CanLII 873 , 44 BLR (4th) 277(17 January 2008), Superior Court of Justice (Ontario,Canada)
  23. Mark A. Wiffen (2011). "Getting blood from a stone – enforcing unpaid corporate judgments against directors". McMillan LLP . Retrieved 2 July 2013.
  24. Stephen Antle. "Oppression, just and equitable winding-up and the family company" (PDF). Borden Ladner Gervais. Archived from the original (PDF) on 15 December 2013. Retrieved 3 July 2013., discussing Safarik v. Ocean Fisheries Ltd., 1995 CanLII 6269 , 22 BLR (2d) 1; 12 BCLR (3d) 342(20 September 1995), Court of Appeal (British Columbia,Canada)
  25. 1 2 3 J. Anthony Van Duzer (1993). "Who May Claim Relief from Oppression: The Complainant in Canadian Corporate Law". Ottawa Law Review. 25 (3): 476. Archived from the original on 2013-12-16. Retrieved 4 July 2013.
  26. R. v. Sands Motor Hotel Ltd, (1984) 36 Sask. R. 45 (Q.B.)
  27. Prime Computer of Canada Ltd. v. Jeffrey, 1991 CanLII 7157 , 6 OR (3d) 733(13 December 1991), Superior Court of Justice (Ontario,Canada)
  28. Tavares v. Deskin Inc., [1993] O.J. No. 195 (Gen. Div.)
  29. Koschinsky, Jennifer; Herman, Coltyn (October 6, 2022). "An Oppressive Outcome: Alberta Court Finds Directors Responsible for Severance Obligations". Stikeman Elliott., discussing Wisser v CEM International Management Consultants Ltd, 2022 ABQB 414 (14 June 2022)
  30. Filiatrault, Vincent; Shapiro, Elliott (December 2015). "Oppression remedy actions: corporations may be held liable for statements made by their officers". Norton Rose Fulbright., discussing Premier Tech ltée c. Dollo, 2015 QCCA 1159 (9 July 2015)
  31. Perri, Janice; Katz, Anton M. (January 11, 2018). "Strauss et al. v. Wright, 2017 ONSC 5789 (CanLII)". amklaw.ca., discussing Strauss et al v Wright, 2017 ONSC 5789 (3 November 2017)
  32. Pelley v. Pelley, 2003 NLCA 6 at par. 37, 221 Nfld & PEIR 1(22 January 2003), Court of Appeal (Newfoundland & Labrador,Canada)
  33. of NLCA, equivalent to CBCA, s. 241(3)
  34. NLCA
  35. 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.
  36. 1 2 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)