UNIT 8 (WEEKS 12 & 13): MAJORITY RULE & PROTECTING MINORITY INTERESTS
Figure 8: Walmart shareholders meeting (By Walmart [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons)
ALT: A huge crowd at an annual meeting of Walmart shareholders.
Source of image – http://commons.wikimedia.org/wiki/File:Crowd_shot_Walmart_Shareholders%27_Meeting_2010.jpg
UNIT OVERVIEW:
In this unit the variety of statutory provisions enacted with a view to protecting minority interests will be examined. There will be reference to some contractual arrangements that might be adopted towards this end. You will also consider the role of government and the securities regulatory authorities.
UNIT OUTCOME:
Through this unit you will come to an understanding of the limits of corporate democracy and the rights that shareholders (and occasionally others) have in the face of a corporations’ actions. You will come to appreciate the differences between a “derivative action” and the “oppression remedy”. You should by the end of unit understand their similarities and differences. You should also be in a position to see why these legal tools are important to shareholders as you briefly examine and review some of the more notorious corporate scandals over the recent years. Finally you should be able to begin thinking about what a lawyer’s role in preventing corporate abuses might look like.
UNIT READINGS:
Please read the following materials:
Casebook pages 427-567.
BCBCA sections 227-228, 232-236; CBCA section 241.
“Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper: http://www.fasken.com/files/Event/2508039d-8edf-46ac-a158-52dad507f6d6/Presentation/EventAttachment/572b7f22-e024-4e6b-8243-5362e5197614/53611_2_CohenPontin.pdf
“Report Slams Hollinger’s Black For a ‘Corporate Kleptocracy’”: http://online.wsj.com/news/articles/SB109395499363105646
Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) http://canlii.ca/t/1j6qd
“The Fall of Conrad Black” http://www.youtube.com/watch?v=CIRRUvjkLJo
“Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html
“Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convictedof-fraud-and-forgery-1.778879
“Law society revokes Garth Drabinsky’s licence over fraud convictions” http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html
“Lawyers, Ethics, and Enron” http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf
Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3
Stephen M. Bainbridge, “Corporate Lawyers as Gatekeepers” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1980975
TOPIC 1: INTRODUCTION/LOOKING BACK
The exploration of corporate personhood, the legal conundrums caused by it and the legal reactions to it are a significant underlying theme of this course. Another consistent theme can be identified just below the surface of many of the cases explored in the previous unit and in this final substantive unit; the problems of “equality”. How can “equality” be a problem in law you may rightly wonder? To answer that it is important to define the meaning being ascribed to equality in this particular instance and then examine the lack of legal clarity that may flow in the circumstances.
To begin with, you may have noticed that many of the cases we have explored in this course involve, plainly put, wealthy and privileged people. They are often (though by no means always) situations where individuals or companies are suing other individuals or companies alleging that they are entitled to more money (or a shareholding that they believe will equate to more money) in one way or another. This should be no surprise given that legal precedent continuously reinforces that the “best interests” of companies and shareholders is a concept aligned primarily and ultimately with profit.
It is the consequences attendant to this core set of dynamics that is perhaps the most fascinating. For one thing it means not only that “the fight” is usually about making more money as a philosophical starting point, but also that the combatants often are equally matched in both purpose and resources – in other words they are often equal, especially if for example there is a takeover battle at stake. It would be naive to think that this equality does not impact the nature of the legal proceedings. Where so much of what you learn in law school is about rights that have evolved to redress inequalities or grant liberty, the corporate law principles that have evolved that in the real world tend to be mere tools in the hands of often more or less equal litigants. No doubt principle is argued with great ferocity by highly skilled counsel in corporate law, but the fact that in the end it is all mostly just about money surely has an impact (if only below the surface). After all in corporate law we are generally not talking about basic rights (detention without trial; equality before the law; personal discrimination etc.). Is it unfair to wonder whether the relative inconsistency of corporate law principles is one product of this confluence of “equality” and also a product of not dealing with issues of true importance to the human condition, such as personal liberty?
So whether you agree or not, stay on the lookout in this unit (and feel free to look backwards at previous units) for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way.
TOPIC 2: MAJORITY RULE
Please read pages 427-452 of the Casebook.
This section of the course is about the power of shareholder majorities. In this regard there are two questions that commend themselves:
Question 1:
What sorts of things must be done by shareholders?
The more important aspects of this question are discussed at pages 443-448 of the Casebook. You should read these pages to get a general sense of the situation. The details are not overly important for any present purpose but you should note that the BCBCA contains provisions which, in one way or another, are comparable to those of the CBCA that are referred to. We have already visited some of these subjects in detail (for example, the removal of directors).
Question 2:
Are there any limitations on shareholders when they are doing what they are authorized to do?
To begin answering this question please read Allen v. Gold Reefs Of West Africa, Ltd. [1900-1903] All E.R. Rep. 746 (Eng. C.A.) at pages 448-449 of the Casebook as well as the Notes following at pages 449-451 of the Casebook.
In Allen v. Gold Reefs of West Africa, Ltd. the company had altered its articles giving itself a lien on paid up shares which, in effect, addressed the failure of a shareholder, Mr. Zuccani, to pay what was owed in respect of other shares he had that had not been fully paid up. Gold Reefs of West Africa, Ltd.’s articles gave the company a lien on all partly paid shares held by any shareholder in respect of any debt owed to the company. Mr. Zuccani held some partly paid up shares and some fully paid up shares. Mr. Zuccani died insolvent. Gold Reefs of West Africa, Ltd. subsequently decided to alter its articles through special resolution to create a lien on all fully paid shares. This in effect changed the rights of the now deceased shareholder (as well as in theory the rights of all other shareholders going forward). Mr. Allen, who was an executor of Mr. Zuccani’s estate brought action get the fully paid shares’ value.
Lindley M.R. found that the altering of the articles of Gold Reefs of West Africa, Ltd. to be valid as long as the special resolution was done bona fide for the benefit of the company as a whole:
“ The power thus conferred on companies to alter the regulations contained in their articles is limited only by the provisions contained in the statute and the conditions contained in the company’s memorandum of association. Wide, however, as the language of s. 50 is, the power conferred by it must, like all other powers, be exercised subject to those general principles of law and equity which are applicable to all powers conferred on majorities and enabling them to bind minorities. It must be exercised, not only in the manner required by law, but also bona fide for the benefit of the company as a whole, and it must not be exceeded. These conditions are always implied, and are seldom, if ever, expressed. But if they are complied with I can discover no ground for judicially putting any other restrictions on the power conferred by the section than those contained in it. How’s shares shall be transferred, and whether the company shall have any lien on them, are clearly matters of regulation properly prescribed by a company’s articles of association…” (Emphasis added)
The willingness of courts to deal with shareholder amendments and decisions and the extent to which the court’s would interfere resulted in some uncertainty, which was addressed in the case of Greenhalgh v. Arderne Cinemas Ltd. [1950] 2 ALL E.R. 1120 (Eng. C.A.). Please read the case at page 451 of the Casebook.
In Greenhalgh v. Arderne Cinemas Ltd. the original articles of association of Arderne Cinemas Ltd. provided that no sale of shares to an outsider would occur if an existing shareholder was willing to buy those shares. The articles provided: “No shares in the company shall be transferred to a person not a member of the company so long as a member of the company may be willing to purchase such shares at a fair value to be ascertained in accordance with sub-clause (b) hereof”.
The majority shareholder, Mr. Mallard wanted to sell control of Arderne Cinemas Ltd. to a third party. Mr. Greenhalgh was a minority shareholder in Arderne Cinemas and wished to prevent any such sale of control. The articles of Arderne Cinemas Ltd. were amended by special resolution to permit sale to an outsider, if approved, by simple majority. Mr. Greenhalgh argued that the article change was invalid.
Evershed M.R. had the following observations:
“… Certain principles, I think, can be safely stated as emerging from those authorities. In the first place, I think it is now plain that “bona fide for the benefit of the company as a whole” means not two things but one thing. It means that the shareholder must proceed upon what, in his honest opinion, is for the benefit of the company as a whole. The second thing is that the phrase, “the company as a whole”, does not (at any rate in such a case as the present) mean the company as a commercial entity, distinct from the corporators: it means the corporators as a general body. That is to say, the case maybe taking of an individual hypothetical member and it may be asked whether what is proposed is, in the honest opinion of those who voted in its favor, for that person’s benefit.
I think that the matter can, in practice, be more accurately and precisely stated by looking at the converse and by saying that a special resolution of this kind would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders, so as to give to the former an advantage of which the latter were deprived. When the cases are examined in which the resolution has been successfully attacked, it is on that ground. It is therefore not necessary to require that persons voting for a special resolution should, so to speak, dissociate themselves altogether from their own prospects and consider whether what is thought to be for the benefit of the company as a going concern. If, as commonly happens, an outside person makes an offer to buy all the shares, prima facie, if the corporators think it a fair offer and vote in favour of the resolution, it is no ground for impeaching the resolution that they are considering their own position as individuals.”
Discussion Activity 8.1:
Do you see a test here? How are shareholders to act when voting on special resolutions? What can they consider? What must they not do? Is it clear?
Please consider briefly sharing your views on these questions and your reasons.
TOPIC 3: MINORITY PROTECTIONS
On the subject of “Statutory Intervention” please read pages 453-460 of the Casebook.
Welling in the excerpt from “Corporate Law in Canada: The Governing Principles” makes the noteworthy point the: “The common law courts…failed to find any principled approaches to the problem of minority shareholder protection.” What has evolved instead is a statutory codification of remedies as a bulwark against the oppressions that directors, management, and even other shareholders can be complicit in.
The relevant section of the BCBCA can be found in Part 8 “Proceedings”. They include sections 227-228 and 232-236 that broadly corresponds to the CBCA provisions referenced in the Casebook (but note that there are differences). The BCBCA sections are reproduced below:
“Complaints by shareholder
- (1) For the purposes of this section, “shareholder” has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.
(2) A shareholder may apply to the court for an order under this section on the ground
(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or
(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.
(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order
(a) directing or prohibiting any act,
(b) regulating the conduct of the company’s affairs,
(c) appointing a receiver or receiver manager,
(d) directing an issue or conversion or exchange of shares,
(e) appointing directors in place of or in addition to all or any of the directors then in office,
(f) removing any director,
(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,
(h) directing a shareholder to purchase some or all of the shares of any other shareholder,
(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,
(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,
(k) varying or setting aside a resolution,
(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,
(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,
(n) directing correction of the registers or other records of the company,
(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,
(p) directing that an investigation be made under Division 3 of this Part,
(q) requiring the trial of any issue, or
(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.
(4) The court may make an order under subsection (3) if it is satisfied that the application was brought by the shareholder in a timely manner.
(5) If an order is made under subsection (3) (g), (i) or (m), the company must pay to a person the full amount payable under that order unless there are reasonable grounds for believing that
(a) the company is insolvent, or
(b) the payment would render the company insolvent.
(6) If reasonable grounds exist for believing that subsection (5) (a) or (b) applies,
(a) the company is prohibited from paying the person the full amount of money to which the person is entitled,
(b) the company must pay to the person as much of the amount as is possible without causing a circumstance set out in subsection (5) to occur, and
(c) the company must pay the balance of the amount as soon as the company is able to do so without causing a circumstance set out in subsection (5) to occur.
(7) If an order is made under subsection (3) (o), Part 10 applies.
Compliance or restraining orders
- (1) In this section, “complainant” means, in relation to a company referred to in subsection (2), a shareholder of the company or any other person whom the court considers to be an appropriate person to make an application under this section.
(2) If a company or any director, officer, shareholder, employee, agent, auditor, trustee, receiver, receiver manager or liquidator of a company contravenes or is about to contravene a provision of this Act or the regulations or of the memorandum, notice of articles or articles of the company, a complainant may, in addition to any other rights that that person might have, apply to the court for an order that the person who has contravened or is about to contravene the provision comply with or refrain from contravening the provision.
(3) On an application under this section, the court may make any order it considers appropriate, including an order
(a) directing a person referred to in subsection (2) to comply with or to refrain from contravening a provision referred to in that subsection,
(b) enjoining the company from selling or otherwise disposing of property, rights or interests, or from receiving property, rights or interests, or
(c) requiring, in respect of a contract made contrary to section 33 (1), that compensation be paid to the company or to any other party to the contract…
Derivative actions
- (1) In this section and section 233,
“complainant” means, in relation to a company, a shareholder or director of the company;
“shareholder” has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.
(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or
(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.
(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.
(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
Powers of court in relation to derivative actions
- (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,
(b) notice of the application for leave has been given to the company and to any other person the court may order,
(c) the complainant is acting in good faith, and
(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.
(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.
(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,
(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and
(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.
(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that
(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,
(b) the company or any other party to the legal proceeding indemnify
(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or
(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or
(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.
(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.
(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.
Relief in legal proceedings
- If, in a legal proceeding against a director, officer, receiver, receiver manager or liquidator of a company, the court finds that that person is or may be liable in respect of negligence, default, breach of duty or breach of trust, the court must take into consideration all of the circumstances of the case, including those circumstances connected with the person’s election or appointment, and may relieve the person, either wholly or partly, from liability, on the terms the court considers necessary, if it appears to the court that, despite the finding of liability, the person has acted honestly and reasonably and ought fairly to be excused.
Applications to court under this Act
- (1) Subject to subsection (2), an application to the court under this Act may be brought without notice unless notice is specifically required under subsection (2) or otherwise under this Act.
(2) The court may direct that notice of any application under this Act be served on those persons the court requires.
Court may order security for costs
- If a corporation is the plaintiff in a legal proceeding brought before the court, and if it appears that the corporation will be unable to pay the costs of the defendant if the defendant is successful in the defence, the court may require security to be given by the corporation for those costs, and may stay all legal proceedings until the security is given.”
TOPIC 2: STANDING
Now we arrive at the question of “standing”, that being “who” can sue?
Please read the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 453-459 of the Casebook.
Note first, that the definition of complainant in that case applies to both oppression and derivative actions.
In B.C., however, there are different definitions:
- For “complaints by a shareholder (i.e. oppression) see section 227 (1) where “shareholder” can mean beneficial (registered) owner of a share or “any other person whom the court considers to be an appropriate person…”
- In respect of “derivative actions” see section 232 (1) where “complainant” “means, in relation to a company, a shareholder or director of the company”.
The essential legal question in First Edmonton Place Ltd. v. 315888 Alberta Ltd. was whether a creditor of the company was a proper person in the opinion of the court under the Alberta Business Corporations Act? In First Edmonton Place Ltd. v. 315888 Alberta Ltd. a landlord (First Edmonton Place) sued three lawyers through their company” 315888 Alberta Ltd. for an alleged debt arising from the occupancy of the landlord’s premises.
McDonald J. framed thoroughly reviewed the legislative history of the relevant provisions before coming to the conclusion that First Edmonton Place Ltd. was indeed had standing as a proper plaintiff but not because it was a simple creditor:
“Is the applicant a “complainant” entitled to apply for leave to bring an action under s. 232 or s. 234?
In order to obtain leave to bring an action under either of these sections, the applicant must be found to be a “complainant” as defined in s. 231. As the applicant is clearly not within s. 231(b)(ii), First Edmonton Place can satisfy this requirement only if it can come within s. 231(b)(i) or (iii).
Is the applicant a “complainant” within the meaning of s. 231(b)(i)?
It will be recalled that s. 231(b)(i) defines a “complainant” as “a registered holder or beneficial owner, or a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates”…
This plain meaning reflects the meaning of “bonds, debentures and notes” in the world of corporate financing. In Securities Law and Practice (1984), vol. 1, by V.P. Alboini, bonds and debentures are stated to be the “traditional debt instruments issued by corporations” while notes are “issued by any issuer including individuals” (at pp. 0-33, 0-34).
Is the applicant a “complainant” under s. 231(b)(iii)?
Under s. 231(b)(iii), a person may be a “complainant” if he is a person “who, in the discretion of the Court, is a proper person to make an application under this Part.”
This is not so much a definition as a grant to the court of a broad power to do justice and equity in the circumstances of a particular case, where a person who otherwise would not be a “complainant” ought to be permitted to bring an action under either s. 232 or s. 234 to right a wrong done to the corporation which would not otherwise be righted, or to obtain compensation himself or itself where his or its interests have suffered from oppression by the majority controlling the corporation or have been unfairly prejudiced or unfairly disregarded, and the applicant is a “security holder, creditor, director or officer”…
In the case of a creditor who claims to be a “proper person” to make a s. 232 application, in my view the criterion to be applied would be whether, even if the applicant did not come within s. 231(b)(î) or (ii), he or it would nevertheless be a person who could reasonably be entrusted with the responsibility of advancing the interests of the corporation by seeking a remedy to right the wrong allegedly done to the corporation. The applicant would not have to be a security holder (as I have defined that notion), director or officer of the corporation. The applicant could be a creditor. The applicant might even be a person who at the time of the act or conduct complained of was not a creditor but was a person toward whom the corporation might have a contingent liability. No good purpose would be served in saying more than that now.
I turn now to an application by a person who claims to be a “proper person” to make an application under s. 234. As in the case of an application made under s. 232, an applicant for leave to bring an action under s. 234 does not have to be a security holder, director or officer. The applicant could be a creditor, or even a person toward whom the corporation had only a contingent liability at the time of the act or conduct complained of. However, it is important to note that he would not be held to be a “proper person” to make the application under s. 234unless he satisfied the court that there was some evidence of oppression or unfair prejudice or unfair disregard for the interests of a security holder, creditor, director or officer…
There are two circumstances in which justice and equity would entitle a creditor to be regarded as “a proper person”. (There may be other circumstances; these two are not intended to exhaust the possibilities.) The first is if the act or conduct of the directors or management of the corporation which is complained of constituted using the corporation as a vehicle for committing a fraud upon the applicant. (In the present case there is no evidence suggesting such fraud, although there is some evidence of the directors having used the money paid as a cash inducement for their own personal investment purposes, and that, as I shall later explain, may constitute fraud against the corporation…
Second, the court might hold that the applicant is a “proper person to make an application” for an order under s. 234 if the act or conduct of the directors or management of the corporation which is complained of constituted a breach of the underlying expectation of the applicant arising from the circumstances in which the applicant’s relationship with the corporation arose. For example, where the applicant is a creditor of the corporation, did the circumstances which gave rise to the granting of credit include some element which prevented the creditor from taking adequate steps, when he or it entered into the agreement, to protect his or its interests against the occurrence of which he or it now complains? Did the creditor entertain an expectation that, assuming fair dealing, its chances of repayment would not be frustrated by the kind of conduct which subsequently was engaged in by the management of the corporation? Assuming that the evidence established the existence of such an expectation, the next question would be whether that expectation was, objectively, a reasonable one.
Thus, in the present case, an inquiry would properly be directed at trial toward whether the lessor, First Edmonton Place, at the time of entering into the lease, consciously and intentionally decided to contract only with the numbered company, and not to obtain personal guarantees from the three lawyers. A further proper inquiry would be into whether the lessor entered into the lease fully aware that it was not protecting itself against the possibility that the corporation might pay out the cash advance to the lawyers, leaving no other assets in the corporation, and that the corporation might permit the lawyers to occupy the space without entering into a sublease either for ten years or for any lesser period. In the absence of evidence establishing at least a prima facie case that an injustice would be done to the lessor or that there would be inequity if the lessor were not allowed to bring its action and go to trial, leave to bring the action ought not to be granted. There is, in the present case, no evidence showing that there was an expectation on the part of the lessor that the lessee corporation would retain the funds in its hands for any set period of time or any time at all. Nor is there any evidence that there was an expectation that the lessee corporation would grant a lease for a term of ten years or any other set term beyond the rent-free period, to the law firm or any other person or persons. It is true that the lease contemplated the possibility that the corporation would enter into a lease with the lawyers, for it specified that the lessee could do so. That falls far short of evidencing the existence of an expectation that there would be a lease for the entire ten-year period or for any set term longer than the rent-free period and less than ten years. Nor does the evidence establish any inequality of bargaining power between First Edmonton Place on the one hand and the three lawyers and their corporation on the other, at the time the lease was being negotiated. If there were some circumstances evidencing such inequality of bargaining power, the result might be different…
CONCLUSION
In the case of the application under s. 232, the applicant was not a holder of a security or a “creditor” at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.
Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under s. 232 in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.” (Emphasis added)
Note that section 227 (1) of the BCBCA is an oppression provision comparable to that in First Edmonton Place Ltd. v. 315888 Alberta Ltd. However also note that section 233 (1) of the BCBCA dealing with “derivative actions”, being those where you are suing essentially “on behalf the corporation” is very different. In section 233 (1) of the BCBCA there is no discretionary category; only shareholders (legal or beneficial) or directors have standing to sue.
TOPIC 3: STATUTORY REPRESENTATIVE ACTIONS: “DERIVATIVE ACTIONS”
Please read pages 461-463 of the Casebook.
Please read the following passage from the Supreme Court of Canada’s 2008 decision in BCE Inc. v. 1976 Debentureholders regarding the background and purpose of “derivative actions”.
“The first remedy provided by the CBCA is the s. 239 derivative action, which allows stakeholders to enforce the directors’ duty to the corporation when the directors are themselves unwilling to do so. With leave of the court, a complainant may bring (or intervene in) a derivative action in the name and on behalf of the corporation or one of its subsidiaries to enforce a right of the corporation, including the rights correlative with the directors’ duties to the corporation. (The requirement of leave serves to prevent frivolous and vexatious actions, and other actions which, while possibly brought in good faith, are not in the interest of the corporation to litigate.)”
Please also reflect on the notion that the need for “derivative actions” arises, at least in part, from the concentration of power and attendant conflicts of interest that often flows from corporate managers overstepping their legal boundaries. Ironically, and sadly, because they are the usual representatives of the “corporate legal personality”, it is often those wrong-doing corporate managers who are cast as the representatives of the corporation which should be investigating them and seeking redress from them on behalf of the corporation and its shareholders. As the author of the casebook points out:
“…however, enforcing these fiduciary duties is difficult if the only actors who can represent the corporation are the very managers who have violated those duties. This explains why other individuals (“complainants”) are permitted to represent the corporation’s interests via the derivative action in circumstances where management fails to assume such responsibility. Since the derivative action is a representative action on behalf of the corporation that seeks recompense for harm done to the corporation, any proceeds awarded from the litigation logically flows to the corporation and not to the complainant.”
Now please note that per the decision in Shield Development Co. v. Snyder, [1976] 3 W.W.R. 44 (B.C.S.C.) it was found that the B.C. statute limited common law “derivative” actions:
“The legislation does not expressly prohibit the bringing of a common-law derivative action but, in my view, such an action is prohibited by necessary implication. I am unable to see how the two remedies could exist side-by-side without creating confusion to an intolerable degree.”
In this light it may also be worthwhile to revisit section 232 and section 233 of the BCBCA:
“Derivative actions
- (1) In this section and section 233,
“complainant” means, in relation to a company, a shareholder or director of the company;
“shareholder” has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.
(2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or
(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.
(3) Subsection (2) applies whether the right, duty or obligation arises under this Act or otherwise.
(4) With leave of the court, a complainant may, in the name and on behalf of a company, defend a legal proceeding brought against the company.
Powers of court in relation to derivative actions
- (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,
(b) notice of the application for leave has been given to the company and to any other person the court may order,
(c) the complainant is acting in good faith, and
(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.
(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.
(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,
(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and
(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.
(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that
(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,
(b) the company or any other party to the legal proceeding indemnify
(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or
(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or
(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.
(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.
(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”
Please read the cases of Farnham v. Fingold (1973) 2 O.R. 132 (Ont. C.A.) and Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2D) 216. Please also remember the case of First Edmonton Place Ltd. v. 315888 Alberta Ltd. that you read not too long ago. Note that these cases all help define, in one way or another, the distinctions between “derivative” and “oppression” actions.
In Farnham v. Fingold, the Ontario Court of Appeal dealt with an interlocutory motion to strike out a statement of claim for disclosing no reasonable cause of action. The background facts involved the sale of a majority interest in a company for a premium. The same offer was not made to the minority shareholders. The claim alleged that the majority shareholders had a fiduciary obligation to share the premium with the minority shareholders. The decision was among the first Canadian cases to analyze and distinguish between a personal action and a derivative action in consideration of the requirements the Ontario Business Corporations Act.
Jessup J.A. stated:
“Certain parts of the statement of claim in particular all or parts of paras. 22, 23, 29, 32, 34, 36 and 37E are concerned with rights, duties or obligations owed to the defendant Slater Steel Industries Limited or with damage alleged to be suffered by the corporation as a result of the actions of the other defendants. Such matters are properly the subject of a derivative action rather than a class action.”
On the particular claims at issue the Ontario Court of Appeal dismissing the action as a “derivative action” under the statute, but preserving the possibility of an “oppression action” being validly brought forth.
Goldex Mines Ltd. v. Revill involved the pleadings in a longstanding shareholder battle and again was concerned with the distinction between derivative actions and oppression claims.
The Ontario Court of Appeal dealt with the distinction:
“Where a legal wrong is done to shareholders by directors or other shareholders, the injured shareholders suffer a personal wrong, and may seek redress for it in a personal action. That personal action may be by one shareholder alone, or (as will usually be the case) by a class action in which he sues on behalf of himself and all other shareholders in the same interest (usually, all other shareholders save the wrongdoers). Such a class action is nevertheless a personal action.
A derivative action, on the other hand, is one in which the wrong is done to the company. It is always a class action, brought in representative form, thereby binding all the shareholders…”
A bit later in the decision the Ontario Court of Appeal quoted with approval from the judgment of Traynor C.J. in the California case of Jones v. H.F. Ahmanson & Co. where the case of Shaw v. Empire Savings & Loan Assoc. was cited:
“…the court [in Shaw] noted the “well established general rule that a stockholder of a corporation has no personal or individual right of action against third persons, including the corporation’s officers and directors, for a wrong or injury to the corporation which results in the destruction or depreciation of the value of his stock, since the wrong suffered by the stockholder is merely incidental to the wrong suffered by the corporation and affects all stockholders alike.” From this the court reasoned that a minority shareholder could not maintain an individual action unless he could demonstrate the injury was somehow different from that suffered by other minority shareholders. In so concluding the court erred. The individual wrong necessary to support a suit by a shareholder need not be unique to that plaintiff. The same injury may affect a substantial number of shareholders. If the injury is not incidental to an injury to the corporation, an individual cause of action exists.”
In the end the cases of Farnham v. Fingold, Goldex Mines Ltd. v. Revill and First Edmonton Place Ltd. v. 315888 Alberta Ltd. emphasize the necessity for a careful analysis of the nature of the complaint, in particular whether the class of the complaint corporate or individual (personal)? If it is not corporate, a derivative action is not appropriate.
All of this should now become somewhat clearer in looking yet again at section 232(2) of the BCBCA:
“Derivative actions
- (2) A complainant may, with leave of the court, prosecute a legal proceeding in the name and on behalf of a company
(a) to enforce a right, duty or obligation owed to the company that could be enforced by the company itself, or
(b) to obtain damages for any breach of a right, duty or obligation referred to in paragraph (a) of this subsection.”
Please also read he notes on “Prerequisite Steps at pages 471-472 of the Casebook. In relation to that please also read again section 233 of the BCBCA:
“Powers of court in relation to derivative actions
- (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if
(a) the complainant has made reasonable efforts to cause the directors of the company to prosecute or defend the legal proceeding,
(b) notice of the application for leave has been given to the company and to any other person the court may order,
(c) the complainant is acting in good faith, and
(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.
(2) Nothing in this section prevents the court from making an order that the complainant give security for costs.
(3) While a legal proceeding prosecuted or defended under this section is pending, the court may,
(a) on the application of the complainant, authorize any person to control the conduct of the legal proceeding or give any other directions for the conduct of the legal proceeding, and
(b) on the application of the person controlling the conduct of the legal proceeding, order, on the terms and conditions that the court considers appropriate, that the company pay to the person controlling the conduct of the legal proceeding interim costs in the amount and for the matters, including legal fees and disbursements, that the court considers appropriate.
(4) On the final disposition of a legal proceeding prosecuted or defended under this section, the court may make any order it considers appropriate, including an order that
(a) a person to whom costs are paid under subsection (3) (b) repay to the company some or all of those costs,
(b) the company or any other party to the legal proceeding indemnify
(i) the complainant for the costs incurred by the complainant in prosecuting or defending the legal proceeding, or
(ii) the person controlling the conduct of the legal proceeding for the costs incurred by the person in controlling the conduct of the legal proceeding, or
(c) the complainant or the person controlling the conduct of the legal proceeding indemnify one or more of the company, a director of the company and an officer of the company for expenses, including legal costs, that they incurred as a result of the legal proceeding.
(5) No legal proceeding prosecuted or defended under this section may be discontinued, settled or dismissed without the approval of the court.
(6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”
Discussion Activity 8.2:
As you review and break down the component elements in section 233 (1) of the BCBCA please also notice the provisions of the OBCA referred to in Armstrong v. Gardner (1978), 20 O.R. (2d) 648 (H.C.) at page 472-473 of the Casebook. What do you think is the explanation for OBCA section 99 (3) (a) requiring that “the shareholder was a shareholder of the corporation at the time of the transaction or other event giving rise to the cause of action…”? Might it be an effective tool to prevent speculation on “derivative actions”? Note that the same sort of limitation does not appear in the bcbca.
In this regard it is worth knowing that a “strike suit” is a nuisance legal action. It is brought by a small shareholder with a virtually insignificant interest in a corporation with a view to achieving a profitable settlement before actually going to court. Such actions frequently appeared in the U.S. when the defendant corporation was much larger than the plaintiff and for that reason a settlement amount could be less than what the defendant’s legal costs might have been. Strike suits were never common in Canada. A 2005 decision of U.S. Supreme Court (Dura Pharmaceuticals, Inc. v. Broudo, (2005) 544 U.S. 336) made them much more difficult and accordingly they have become less common in the present day.
Are such protections as OBCA section 99 (3) (a) or an analogous decision to the that of the U.S. Supreme Court in Dura Pharmaceuticals, Inc. v. Broudo necessary? Or are such protections subsumed within the potential interpretations of sections 233 (1) (c) and (d) of the BCBCA?:
“233. (1) The court may grant leave under section 232 (2) or (4), on terms it considers appropriate, if…
(c) the complainant is acting in good faith, and
(d) it appears to the court that it is in the best interests of the company for the legal proceeding to be prosecuted or defended.”
Please consider briefly sharing your views on these questions and your reasons.
Finally we conclude this part of the discussion with section 233 (6) of the BCBCA, which states:
“233. (6) No application made or legal proceeding prosecuted or defended under section 232 or this section may be stayed or dismissed merely because it is shown that an alleged breach of a right, duty or obligation owed to the company has been or might be approved by the shareholders of the company, but evidence of that approval or possible approval may be taken into account by the court in making an order under section 232 or this section.”
You will recall that we previously studied the possibly salutary impacts of both advance and subsequent shareholder approval to deal contentious issues or remedy errors where not involving fraud or bad faith. It is useful to reflect on how section 233(6) reserves considerable discretion to the court to deal with a special resolution as it sees fit.
TOPIC 4: THE OPPRESSION REMEDY
Please read pages 490-540 of the Casebook. You will find that you are already familiar with a number of the cases (and even the principles) that you will be reading.
Please note the Casebook authors’ somewhat disconcerting words at the bottom of page 490 of the Casebook:
“Most Canadian jurisdictions have followed the C.B.C.A. lead and enacted an “oppression” remedy. There is a relatively large volume of cases in Canada since the statutory change. One reason for the volume is lack of theory: the remedy is relatively new to Canada. Moreover, precedent is not particularly helpful: the remedy is invoked in a wide variety of circumstances and judges are statutorily empowered to do whatever they want in each case.”
Beginning to sound familiar?
Now please read sections 227 (1) (2) and (3) of the BCBCA:
“Complaints by shareholder
- (1) For the purposes of this section, “shareholder” has the same meaning as in section 1 (1) and includes a beneficial owner of a share of the company and any other person whom the court considers to be an appropriate person to make an application under this section.
(2) A shareholder may apply to the court for an order under this section on the ground
(a) that the affairs of the company are being or have been conducted, or that the powers of the directors are being or have been exercised, in a manner oppressive to one or more of the shareholders, including the applicant, or
(b) that some act of the company has been done or is threatened, or that some resolution of the shareholders or of the shareholders holding shares of a class or series of shares has been passed or is proposed, that is unfairly prejudicial to one or more of the shareholders, including the applicant.
(3) On an application under this section, the court may, with a view to remedying or bringing to an end the matters complained of and subject to subsection (4) of this section, make any interim or final order it considers appropriate, including an order
(a) directing or prohibiting any act,
(b) regulating the conduct of the company’s affairs,
(c) appointing a receiver or receiver manager,
(d) directing an issue or conversion or exchange of shares,
(e) appointing directors in place of or in addition to all or any of the directors then in office,
(f) removing any director,
(g) directing the company, subject to subsections (5) and (6), to purchase some or all of the shares of a shareholder and, if required, to reduce its capital in the manner specified by the court,
(h) directing a shareholder to purchase some or all of the shares of any other shareholder,
(i) directing the company, subject to subsections (5) and (6), or any other person, to pay to a shareholder all or any part of the money paid by that shareholder for shares of the company,
(j) varying or setting aside a transaction to which the company is a party and directing any party to the transaction to compensate any other party to the transaction,
(k) varying or setting aside a resolution,
(l) requiring the company, within a time specified by the court, to produce to the court or to an interested person financial statements or an accounting in any form the court may determine,
(m) directing the company, subject to subsections (5) and (6), to compensate an aggrieved person,
(n) directing correction of the registers or other records of the company,
(o) directing that the company be liquidated and dissolved, and appointing one or more liquidators, with or without security,
(p) directing that an investigation be made under Division 3 of this Part,
(q) requiring the trial of any issue, or
(r) authorizing or directing that legal proceedings be commenced in the name of the company against any person on the terms the court directs.” (Emphasis added)
Now please note differences between sections 227 (1) (2) and (3) of the BCBCA and the equivalent sections of the CBCA section 241:
“Application to court re oppression
- (1) A complainant may apply to a court for an order under this section.
Grounds
(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.
Powers of court
(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.
Duty of directors
(4) If an order made under this section directs amendment of the articles or by-laws of a corporation,
(a) the directors shall forthwith comply with subsection 191(4); and
(b) no other amendment to the articles or by-laws shall be made without the consent of the court, until a court otherwise orders.
Exclusion
(5) A shareholder is not entitled to dissent under section 190 if an amendment to the articles is effected under this section.
Limitation
(6) A corporation shall not make a payment to a shareholder under paragraph (3)(f) or (g) if there are reasonable grounds for believing that
(a) the corporation is or would after that payment be unable to pay its liabilities as they become due; or
(b) the realizable value of the corporation’s assets would thereby be less than the aggregate of its liabilities.
Alternative order
(7) An applicant under this section may apply in the alternative for an order under section 214.”
All of which somewhat begs the question: What is the meaning of “Oppression”? Or put another way what is the standard of what will be considered “Oppression” defined?
To focus on this question this please begin by reading Westfair Foods Ltd. v. Watt [1991] A.J. No. 321 at pages 492-494 of the Casebook.
The facts were that Westfair Foods Ltd. had Class A shares carrying a $2 dividend in priority to the common shares. There were many Class A shareholders and only a single holder of the common shares. The Class A shares were also entitled to share in surplus assets including retained earning in the event of a liquidation. Historically all profits beyond the dividend attached to the class A shares would be retained by Westfair Foods Ltd. as earnings. At a certain point the directors of Westfair Foods Ltd. decided to change the policy and after paying the fixed dividend to the holders of Class A shares, the company paid all of its net earnings to the single common shareholder. The Class A shareholders claimed the new policy was oppressive to their interests.
Kearns J.A. of the Alberta C.A. found the new policy to be oppressive to the Class A shareholders. The logic, reasoning and common sense displayed by the learned judge in examining “oppressive conduct” is well worth reproducing here:
“I turn then to the substantial rights conferred by the provision. Obviously, they turn on effect not intent. Equally obviously, they govern all the activities of the corporation. The rights conferred upon shareholders are that they, at any time and in any way during their relationship with the company, are to be insulated from anything oppressive, unfairly prejudicial, or that unfairly disregards their interests. For the relations among shareholders, this is a major modification of majority rule.
In my view, the provisions were and remain a compendious way for Parliament to say to the courts that the classes mentioned in the Act are to be treated fairly in the sense of justly by corporations. For example, both parties cite and rely on Ebrahimi v. Westbourne Galleries, [1973] A.C. 360. Lord Wilberforce there said at p. 379:
… there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.
I agree with a similar sentiment by McDonald J. in First Edmonton Place v. 315888 Alberta Ltd. 1988 168 (AB QB), (1988), 40 B.L.R. 28 at pp. 59-60, 60 Alta. L.R. (2d) 122, 10 A.C.W.S. (3d) 268 (Q.B.).
I cannot put elastic adjectives like “unfair”, “oppressive” or “prejudicial” into watertight compartments. In my view, this repetition of overlapping ideas is only an expression of anxiety by Parliament that one or the other might be given a restrictive meaning…
Having concluded that the words charge the courts to impose the obligation of fairness on the parties, I must admit that the admonition offers little guidance to the public, and Parliament has left elucidation to us. I have elsewhere said that I take this sort of indirection as legislative delegation: see Transalta Utilities Corp. v. Alberta Public Utilities Board 1986 ABCA 64 , (1986), 43 Alta. L.R. (2d) 171 at p. 180, 68 A.R. 171, 36 A.C.W.S. (2d) 376 (C.A.).
We fail in that duty of elucidation, I think, if we merely say “this is fair” or “that is not fair” without ever explaining why we think this or that is fair. Thus I, and I dare say others, am not much helped by cases and comments that simply announce that I am to enforce “fair play” or “fair dealing”: see, for example, Dickerson, op. cit. , para. 48.
On the other hand, I do not understand that the delegation of this duty permits a judge to impose personal standards of fairness. Let me illustrate what is probably obvious by two extreme examples. A judge who firmly believes in the virtues of unrestricted private enterprise might say that fairness requires that people protect themselves to their best capacity, and that the courts not protect those who fail to protect themselves. On the other hand, a judge who firmly believes that private property is a trust held for the benefit of society as a whole might say that what is fair is what best benefits society.
The role of a judge in our society limits the impulses of both my mythical judges. We must not make rules unless we can tie them to values that seem to have gained wide acceptance. We do that largely by testing any proposed rule against other legal rules, which by long tradition seem accepted. In short we seek precedent, or we seek to argue from what we consider to be principles adopted in precedent…
I will not attempt to catalogue all the rules generated by the words in the statute. For example, the courts have imposed the duty on directors to protect the interests of all shareholders, not just those who elect them. I will later deal with that rule. The authorities also impose upon the majority interest the obligation not to use their electoral power to profit themselves at the expense of minority shareholders. The principal complaint here does not engage that rule. The complaint is not by a minority who has been outvoted. It is by an entire class of shares in competition with another class of shares.
It is said for the shareholders that yet another rule exists. This is that the directors must have due regard for, and deal fairly with, the “interests” of all shareholders. I have concern about over-use of the word interests. This example serves to express it: a thief is very interested in my watch, and will get it if he can. A law about fairness will not, however, show any respect for his interest. The real question is whether the law should accept his obvious interest in financial gain as, in all the circumstances, one that deserves protection. I do not accept that all ambition to acquire property deserves protection. I do accept that our tradition is that a hope for profit, as opposed to a mere desire, sometimes deserves protection.
One deserving case is where the person to whom the profit will go has nourished that hope. The company and the shareholders entered voluntarily, not by duty or chance, into a relationship. Our guides are the rules in other contexts, such as contract law, equity, and partnership law, where the courts have also considered just rules to govern voluntary relationships. In very general terms, one clear principle that emerges is that we regulate voluntary relationships by regard to the expectations raised in the mind of a party by the word or deed of the other, and which the first party ordinarily would realize it was encouraging by its words and deeds. This is what we call reasonable expectations, or expectations deserving of protection. Regard for them is a constant theme, albeit variously expressed, running through the cases on this section or its like elsewhere. I emphasize that all the words and deeds of the parties are relevant to an assessment of reasonable expectations, not necessarily only those consigned to paper, and not necessarily only those made when the relationship first arose.
I do not for a moment suggest that that analysis about expectations deserving protection is the sole basis for rules under the statute. I think, for example, of totally unforeseen windfalls or calamities. This is not such a case, but I dare say that even in those cases the expectations of the parties are a sound starting point. And the test will always be helpful in cases where mere interests collide.
The test then is always facts-specific, and cases decided on other facts offer only a limited guide. Unfortunately, no other reported case offers the same facts as this.” (Emphasis added)
As a footnote it is well worth drawing your attention to a fuller version of the classic statement made by Lord Wilberforce in Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 at 379 which was quoted by Kearns J.A. immediately above:
“The foundation of it all lies in the words ‘just and equitable’ and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own; that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Company Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”
Next please read again, but from a somewhat different perspective, the case of Deluce Holdings Inc. v. Air Canada (1992) 98 D.L.R. 94th) 509 (Gen. Div.) at pages 494-502 of the Casebook.
In this case Air Canada owned 75% of the shares of Air Ontario and De Luce Holdings Ltd. (controlled by the De Luce family) owned the remaining 25%. The interests of both Air Canada and De Luce Holdings Ltd. were held in a numbered company, 152160 Canada Inc. The board of directors of Air Ontario was comprised of 7 nominees of Air Canada and 3 nominees from De Luce. William De Luce was named president of Air Ontario. At a certain point Air Canada changed its business strategy to seek 100% control of its regional carriers. Despite apparently doing a good job William De Luce was asked to resign by the Air Canada board representatives. He refused and was terminated by the board of Air Ontario, which in turn was controlled by Air Canada nominees. The “Unanimous Shareholders Agreement” of 152160 Canada Inc. governed the relationship between Air Canada and the De Luce family interests. That agreement provided Air Canada with an option to acquire the De Luce shareholdings in Air Ontario at “fair market value” (to be arbitrated if not agreed upon) upon termination either by Air Ontario or 152160 Canada Inc. of the employment of the last of William De Luce of his father Stanley De Luce. Apparently, termination could be “for any reason”. In February 1989 the employment of Stanley De Luce ended and not renewed. In October 1991 William De Luce terminated by a decision of the board of 152160 Canada Inc.
De Luce Holdings Ltd alleged oppression. They argued that since the since the oppressive actions of Air Canada to the De Luce Family as shareholders in Air Ontario were the foundation of the arbitration that sought to determine the value of the shares which the De Luce family were required to sell to Air Canada, the arbitration should be stopped.
Blair J. noted that the motivation for terminating William De Luce as president of Air Ontario was the pursuit of a perfectly legitimate corporate objective on the part of Air Canada. However two questions commended themselves:
- Was Air Canada entitled to its use majority position on the board of Air Ontario for the predominant purpose of carrying out Air Canada’s corporate objective (as opposed to the corporate objective of Air Ontario), or whether such conduct was “oppressive” of the minority shareholders in Air Ontario?;
- If oppressive, then does that oppressiveness undercut the apparent right under the Unanimous Shareholders Agreement to terminate William De Luce “for any reason” (and thus triggering Air Canada’s call on the De Luce family shares)?
The Court decided to use its discretion to stay the arbitration proceedings. Air Canada’s nominee directors had too obviously disregarded the interests of other stakeholders. Whether there were sufficient reasons to terminate Mr. De Luce, it was obvious to the court that the nominee directors had failed to conduct such any legitimate and focused analysis and were in fact guided by Air Canada’s corporate agenda. This sort of behavior was deemed oppressive and in breach of the nominees’ fiduciary duty to Air Ontario.
Ironically (and unusually) invoking the arbitration clause might be said to have been oppressive in itself. The Court reasoned that the majority shareholder “visited oppression upon a minority shareholder” and the majority’s conduct was found to be unfairly prejudicial and to have unfairly disregarded the interests of the minority shareholder.
Blair J. had the following to say on the subject of “Oppression”:
“In my view, the conduct of Air Canada and its nominee directors, as outlined above, could be found, after a trial, to constitute “oppression” of Deluceco’s interests as a minority shareholder in Air Ontario. While the conduct may not constitute “oppression” in the classic sense of conduct which is “lacking in probity” or “burdensome, harsh and wrongful”, it may nonetheless be conduct which is “unfairly prejudicial” to or which “unfairly disregards” the interests of Deluceco as a minority shareholder, contrary to s. 241 of the C.B.C.A. The authorities make it clear that this distinction exists and that the latter sort of conduct constitutes grounds that are “less rigorous” than oppression…”
On the subject of the distinction between “legal rights” and the interests or expectations of shareholders Blair J. said the following:
“Cases dealing with oppression remedy situations have emphasized the distinction between the strict “legal rights” of shareholders and their “interests”. For instance, in Westfair Foods Ltd. v. Watt…[1990] 4 W.W.R. 685…Moore C.J.Q.B stated at page 59:
An examination of the leading cases dealing with the C.B.C.A. and in particular s. 241, is worthwhile. In enacting s. 241, Parliament obviously intended that strict attention should be paid to the interests of all shareholders, not just the legal rights of shareholders.
(Emphasis in original.)
Mr. Justice Farley elaborated on this distinction in 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R (2d) at p.123… by commenting on the connection between shareholder “interests” and shareholder “expectations”. At pp. 185–6 he said:
Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. 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…”
Please read the very useful notes and questions at pages 502-507 of the Casebook. In particular please note the useful summary set out by Killeen J. In Krynen v. Bugg (2003) 64 O.R. (3d) 393 (S.C.J.):
“A summary of the leading principles and guiding rules which has come out of that case law would include the following:
(1) The overriding lodestar principle of oppression law is that, when determining whether there has been oppression of a shareholder, the court must determine what the reasonable expectations of that person were according to the arrangements which existed between the principals. The cases on this issue have been helpfully collected and reviewed by Farley J. in 8200099 Ontario Inc. v. Harold E. Ballard Ltd. (1992) 3 B.L.R. (2d) 123 (Ont. Gen. Div.) where he said this at pp. 185-86:
Shareholder interests would appear to be intertwined with shareholder expectations. It does not appear to me that the shareholder expectations which are to be considered are those that a shareholder has as his own individual “wish list”. 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.
This statement of principle by Farley J. was expressly approved of by the Ontario Court of Appeal in its important judgment in Naneff v. Con-Crete Holdings Limited et. al. 1995 959 (ON CA), (1995), 23 O.R. (3d) 481 (C.A.) at p. 490.
(2) The term “oppression” connotes an inequality of bargaining power while “unfairness” connotes an obligation to act equitably and impartially in the exercise of power and authority: Re Alldrew Holdings Ltd. v. Nibro Holdings 1993 5509 (ON SC), (1993), 16 O.R. (3d) 718 at p. 732. (Ont. Gen. Div.)
(3) The terms, “unfair prejudice to” and “unfair disregard of the interests of” require less rigorous tests than oppression. Where on the totality of the evidence the actions and conduct complained of go beyond mere inconvenience and lack of information, and the interests of the complainant have been unfairly disregarded, the complainant will be entitled to a remedy: Re Mason and Intercity Properties Ltd. 1987 173 (ON CA), (1987), 59 O.R. (2d) 631, at p. 635. (Ont. C.A.)
(4) There is no requirement that bad faith must be shown before an order to rectify a complaint may be made in an oppression case: Re Sidaplex-Plastic Suppliers Inc. v. Elta Group Inc. 1998 5847 (ON CA), (1998), 40 O.R. (3d) 563 at p. 567 (C.A.); Loveridge Holdings v. King-Pin Ltd. reflex, (1992), 5 B.L.R. (2d) 195, at p. 203 (Ont.Gen. Div.)
(5) Where expectations are apparently reasonable on their face but where there is a contract dealing with these expectations, the reasonableness of these expectations cannot prevail over the contract.
(6) Reasonable expectations are not necessarily “static” or frozen expectations and may evolve or change as the principals adapt their arrangements from time to time: 820099 Ontario Inc. v. Harold Ballard Ltd., supra, at p. 191.
(7) The business and affairs of a corporation are managed by or under the direction of its board of directors. The “business judgment rule” operates to shield from court intervention business decisions which have been made honestly, prudently, in good faith and on reasonable grounds. In such cases, the board’s decisions will not be subject to microscopic examination and the court will be reluctant to interfere with and usurp the board’s function in managing the corporation: Re C.W. Shareholdings Inc. v. WIC Western International Communications Ltd. 1998 14838 (ON SC), (1998), 39 O.R. (3d) 755 at para. 57 (Ont.Gen. Div.); Brant Investments Ltd. v. Keeprite Inc. 1991 2705 (ON CA), (1991), 3 O.R. (3d) 289, at pp. 320-21. (C.A.) A useful three-part test or approach has been suggested for the application of the business judgment rule:
(1) Was the impugned conduct outside the range of reasonable business judgment?
(2) Was the impugned conduct inconsistent with the reasonable expectations of the complainant?
(3) Did the impugned conduct cause prejudice to the complainant?
Main v. Delcan Group Inc.(1999), 47 B.C.R. (2d) 200 at para. 31 (Ont. S.C.J.).
The Ontario Court of Appeal has also considered the rule in Pente Investment Management Ltd. v. Schneider Corp., 1998 5121 (ON CA), (1998), 44 B.L.R. (2d) 115, at para. 36 (C.A.):
The law as it has evolved in Ontario and Delaware has the common requirements that the court must be satisfied that the directors have acted reasonably and fairly. The court looks to see that the directors made a reasonable decision not a perfect decision. Provided the decision taken is within a range of reasonableness, the court ought not to substitute its opinion for that of the board even though subsequent events may have cast doubt on the board’s determination. As long as the directors have selected one of several reasonable alternatives, deference is accorded to the board’s decision…. This formulation of deference to the decision of the Board is known as the “business judgment rule”. The fact that alternative transactions were rejected by the directors is irrelevant unless it can be shown that a particular alternative was definitely available and clearly more beneficial to the company than the chosen transaction….”
See, also, Themadel Foundation v. Third Can. General Investment Trust 1998 973 (ON CA), (1998), 38 O.R. (3d) 749 at 754 (C.A.).
(8) Actual or material loss is not a prerequisite to a finding either of oppression, unfair prejudice or unfair disregard of interest. The object of the remedies available under s.248(3) is to prevent the continuation of the misconduct in question if it is established that a harm or detriment, in the sense of infringement of rights or privileges, will follow in the absence of restraining such misconduct. On this issue, the concept of detriment as a prerequisite to obtaining a remedy is similar to the concept inherent in a quia timet injunction – even if there is no material loss or damage at the time but reasonable grounds are established to apprehend the same occurring if there is no relief granted, the applicant for the quia timet remedy will be entitled to the relief sought. Thus, in establishing unfair disregard of the applicant’s interests as a result of misconduct, there is no requirement that there be actual detriment or loss to the applicant: Sahota v. Basra 1999 14945 (ON SC), (1999), 45 B.L.R. (2d) 143, at para. 30 (Ont. General Div.).
(9) Wrongful dismissal, standing alone, will not justify a finding of oppression. It is only where the interests of the employee are closely intertwined with his interests as a shareholder, and where the dismissal is part of a pattern of conduct to exclude the complainant from participation in the corporation, that the dismissal can be found to be an act of oppression: Naneef v. Con-Crete Holding Ltd. reflex, (1993) 11 B.L.R. (2d) 218 at para. 125; Koehner, “The Oppression Remedy: Reasonable Expectations” (1994) 73 Can. Bar. Rev. 274 at 278.”
You are already acquainted with the case of BCE Inc. v. 1976 Debentureholders [2008] 3 S.C.R. 560. In that case the Supreme Court of Canada made the following observations concerning the remedy of “oppression”:
“ B. The Section 241 Oppression Remedy
The debentureholders in these appeals claim that the directors acted in an oppressive manner in approving the sale of BCE, contrary to s. 241 of the CBCA .
Security holders of a corporation or its affiliates fall within the class of persons who may be permitted to bring a claim for oppression under s. 241 of the CBCA . The trial judge permitted the debentureholders to do so, although in the end he found the claim had not been established. The question is whether the trial judge erred in dismissing the claim.
We will first set out what must be shown to establish the right to a remedy under s. 241 , and then review the conduct complained of in the light of those requirements.
(1) The Law
Section 241(2) provides that a court may make an order to rectify the matters complained of where
(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…
Section 241 jurisprudence reveals two possible approaches to the interpretation of the oppression provisions of the CBCA : M. Koehnen, Oppression and Related Remedies (2004), at pp. 79-80 and 84. One approach emphasizes a strict reading of the three types of conduct enumerated in s. 241 (oppression, unfair prejudice and unfair disregard): see Scottish Co-operative Wholesale Society Ltd. v. Meyer, [1959] A.C. 324 (H.L.); Diligenti v. RWMD Operations Kelowna Ltd. (1976), 1 B.C.L.R. 36 (S.C.); Stech v. Davies, [1987] 5 W.W.R. 563 (Alta. Q.B.). Cases following this approach focus on the precise content of the categories “oppression”, “unfair prejudice” and “unfair disregard”. While these cases may provide valuable insight into what constitutes oppression in particular circumstances, a categorical approach to oppression is problematic because the terms used cannot be put into watertight compartments or conclusively defined. As Koehnen puts it (at p. 84), “[t]he three statutory components of oppression are really adjectives that try to describe inappropriate conduct…The difficulty with adjectives is they provide no assistance in formulating principles that should underlie court intervention.”
Other cases have focused on the broader principles underlying and uniting the various aspects of oppression: see First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988), 40 B.L.R. 28 (Alta. Q.B.), var’d (1989), 45 B.L.R. 110 (Alta. C.A.); 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 (Ont. Div. Ct.); Westfair Foods Ltd. v. Watt (1991), 79 D.L.R. (4th) 48 (Alta. C.A.).
In our view, the best approach to the interpretation of s. 241(2) is one that combines the two approaches developed in the cases. One should look first to the principles underlying the oppression remedy, and in particular the concept of reasonable expectations. If a breach of a reasonable expectation is established, one must go on to consider whether the conduct complained of amounts to “oppression”, “unfair prejudice” or “unfair disregard” as set out in s. 241(2) of the CBCA.
We preface our discussion of the twin prongs of the oppression inquiry by two preliminary observations that run throughout all the jurisprudence.
First, oppression is an equitable remedy. It seeks to ensure fairness — what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair: Wright v. Donald S. Montgomery Holdings Ltd. (1998), 39 B.L.R. (2d) 266 (Ont. Ct. (Gen. Div.)), at p. 273; Re Keho Holdings Ltd. and Noble (1987), 38 D.L.R. (4th) 368 (Alta. C.A.), at p. 374; see, more generally, Koehnen, at pp. 78-79. It follows that courts considering claims for oppression should look at business realities, not merely narrow legalities: Scottish Co-operative Wholesale Society, at p. 343.
Second, like many equitable remedies, 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.
Against this background, we turn to the first prong of the inquiry, the principles underlying the remedy of oppression. In Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360 (H.L.), at p. 379, Lord Wilberforce, interpreting s. 222 of the U.K. Companies Act, 1948, described the remedy of oppression in the following seminal terms:
‘The words [“just and equitable”] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure.’
Lord Wilberforce spoke of the equitable remedy in terms of the “rights, expectations and obligations” of individuals. “Rights” and “obligations” connote interests enforceable at law without recourse to special remedies, for example, through a contractual suit or a derivative action under s. 239 of the CBCA. It is left for the oppression remedy to deal with the “expectations” of affected stakeholders. The reasonable expectations of these stakeholders is the cornerstone of the oppression remedy.
As denoted by “reasonable”, the concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. In the context of whether it would be “just and equitable” to grant a remedy, the question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.
Particular circumstances give rise to particular expectations. Stakeholders enter into relationships, with and within corporations, on the basis of understandings and expectations, upon which they are entitled to rely, provided they are reasonable in the context: see 820099 Ontario; Main v. Delcan Group Inc. (1999), 47 B.L.R. (2d) 200 (Ont. S.C.J.). These expectations are what the remedy of oppression seeks to uphold.
Determining whether a particular expectation is reasonable is complicated by the fact that the interests and expectations of different stakeholders may conflict. The oppression remedy recognizes that a corporation is an entity that encompasses and affects various individuals and groups, some of whose interests may conflict with others. Directors or other corporate actors may make corporate decisions or seek to resolve conflicts in a way that abusively or unfairly maximizes a particular group’s interest at the expense of other stakeholders. The corporation and shareholders are entitled to maximize profit and share value, to be sure, but not by treating individual stakeholders unfairly. Fair treatment — the central theme running through the oppression jurisprudence — is most fundamentally what stakeholders are entitled to “reasonably expect”.
Section 241(2) speaks of the “act or omission” of the corporation or any of its affiliates, the conduct of “business or affairs” of the corporation and the “powers of the directors of the corporation or any of its affiliates”. Often, the conduct complained of is the conduct of the corporation or of its directors, who are responsible for the governance of the corporation. However, the conduct of other actors, such as shareholders, may also support a claim for oppression: see Koehnen, at pp. 109-10; GATX Corp. v. Hawker Siddeley Canada Inc. (1996), 27 B.L.R. (2d) 251 (Ont. Ct. (Gen. Div.)). In the appeals before us, the claims for oppression are based on allegations that the directors of BCE and Bell Canada failed to comply with the reasonable expectations of the debentureholders, and it is unnecessary to go beyond this.
The fact that the conduct of the directors is often at the centre of oppression actions might seem to suggest that directors are under a direct duty to individual stakeholders who may be affected by a corporate decision. Directors, acting in the best interests of the corporation, may be obliged to consider the impact of their decisions on corporate stakeholders, such as the debentureholders in these appeals. This is what we mean when we speak of a director being required to act in the best interests of the corporation viewed as a good corporate citizen. However, the directors owe a fiduciary duty to the corporation, and only to the corporation. People sometimes speak in terms of directors owing a duty to both the corporation and to stakeholders. Usually this is harmless, since the reasonable expectations of the stakeholder in a particular outcome often coincide with what is in the best interests of the corporation. However, cases (such as these appeals) may arise where these interests do not coincide. In such cases, it is important to be clear that the directors owe their duty to the corporation, not to stakeholders, and that the reasonable expectation of stakeholders is simply that the directors act in the best interests of the corporation.
Having discussed the concept of reasonable expectations that underlies the oppression remedy, we arrive at the second prong of the s. 241 oppression remedy. Even if reasonable, not every unmet expectation gives rise to claim under s. 241. The section requires that the conduct complained of amount to “oppression”, “unfair prejudice” or “unfair disregard” of relevant interests. “Oppression” carries the sense of conduct that is coercive and abusive, and suggests bad faith. “Unfair prejudice” may admit of a less culpable state of mind, that nevertheless has unfair consequences. Finally, “unfair disregard” of interests extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations: see Koehnen, at pp. 81-88. The phrases describe, in adjectival terms, ways in which corporate actors may fail to meet the reasonable expectations of stakeholders.
In summary, the foregoing discussion suggests conducting two related inquiries in a claim for oppression: (1) Does the evidence support the reasonable expectation asserted by the claimant? and (2) 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?” (Emphasis added)
In the end the Supreme Court of Canada approved the arrangement as fair and dismissed the claim for oppression. Of particular note, though of some frustration to those who want hard and fast “rights based” rules, is the acknowledgment that the court made that 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.”
Discussion Activity 8.3:
In the “Introduction” to this unit you were invited to “…stay on the lookout in this unit…for situations where the relative “equality’ of the parties has some impact on the law evolving in a murkier rather then clearer way”. Does the stress on facts as dictating legal consequences embodied by the court’s approach in BCE Inc. v. 1976 Debentureholders serve to reinforce the subjectivity of “oppression” as a remedy and effectively prevent it from ever being used as a “right” that can truly reform corporate conduct? Please consider briefly sharing your views on this question and your reasons.
Finally on the subject of “Minority Protection” let’s look (once again) at the cases of First Edmonton Place Ltd. v. 315888 Alberta Ltd. (1988) 60 Alta. L.R. (2d) 122 (Q.B.) at pages 511-519 of the Casebook; and Hercules Managements Ltd. v. Ernst & Young [1997] 2 S.C.R. 165 at pages 519-522 of the Casebook.
As you will recall First Edmonton Place Ltd. v. 315888 Alberta Ltd. involved three lawyers and their landlord, and the question focussed upon earlier was what sort of “interest” a creditor would have to have in order to achieve standing in a “derivative” or “oppression” action. In the present context what is noteworthy about the decision in First Edmonton Place Ltd. v. 315888 Alberta Ltd. is what might be thought of as the “impact-oriented focus on harm” taken by the Court of Queen’s Bench of Alberta. In the end leave to bring a “derivative action” was granted but First Edmonton Place Ltd. was not permitted to bring an “oppression” action.
McDonald J. made these observations:
“Assuming the absence of fraud, in what other circumstances would a remedy under s. 234 be available? In deciding what is unfair, the history and nature of the corporation, the essential nature of the relationship between the corporation and the creditor, the type of rights affected and general commercial practice should all be material. More concretely, the test of unfair prejudice or unfair disregard should encompass the following considerations: the protection of the underlying expectation of a creditor in its arrangement with the corporation, the extent to which the acts complained of were unforeseeable or the creditor could reasonably have protected itself from such acts, and the detriment to the interests of the creditor. The elements of the formula and the list of considerations as I have stated them should not be regarded as exhaustive. Other elements and considerations may be relevant, based upon the facts of a particular case…
CONCLUSION
In the case of the application under s. 232, the applicant was not a holder of a security or a “creditor” at the time of use of the cash inducement money by the three directors. However, there is some evidence that the cash inducement money was not used for purposes of the corporation and that its use might have been a fraud upon the corporation. If it was a fraud upon the corporation, and if the corporation were entitled to recover the money from the three directors, the applicant may have a genuine interest in advancing the claim to such recovery because the corporation might be liable in damages to the applicant. Therefore the applicant is in my opinion a proper person to make an application under s. 232 and should be granted leave to bring an action in the name and on behalf of the corporation in respect of the payment of the cash inducement money to or for the benefit of the three lawyers.
Moreover, as for the three lawyers, as directors of the corporation, permitting themselves as lawyers to occupy the leased premises without paying rent or entering into a lease, whether that conduct constituted a wrong to the corporation is a matter that should be tried. Once again, if there was a wrong, the applicant might ultimately stand to benefit from any recovery by the corporation. Therefore the applicant is in my opinion a proper person to make an application under s. 232 in regard to this head of claim and should be granted leave in the same action to advance a claim in the name and on behalf of the corporation in respect of the occupation of the premises by the directors for their own personal purposes and in respect of the failure of the directors to obtain from themselves personally (or their law firm) a sublease for the term of the lease.
Granting leave to bring the statutory derivative action under s. 232 does not in any way imply that on the basis of the evidence placed before me I am of the view that the action is likely to succeed. As to that, of course, I offer no opinion…
In the case of the application under s. 234, leave to bring an action in regard to either claim is denied because the applicant was not a creditor at the time of the act or conduct complained of.” (Emphasis added)
These two cases do not add all that much to what we are already familiar with from the decision in Robak Industries Ltd. v. Gardner, 2007 BCCA 61 discussed in Unit 2.
In Robak Industries Ltd. v. Gardner, (http://www.110.com/panli/panli_87908.html) you may recall that the B.C. Court of Appeal considered the case of Mr. Gardner, a director of Getty Copper Incorporated, a public company. Mr. Gardner was alleged to have conspired with others to injure John Lepinski and the company he wholly owned, Robak Industries Ltd., by “unlawful means” including seizing control of a public company, “Getty Copper Incorporated”, and its board; discrediting and ousting Mr. Lepinski; setting aside a development agreement and acquiring 100% of Getty South a company related to Getty Copper Incorporated; “applying economic duress to Getty” and “inducing Blake Cassels & Graydon to breach their duties to Getty”. There were also allegations of defamation in connection with the affairs of Getty Copper Incorporated. Robak Industries Ltd.’s claim for damages for the defamatory statements included a “loss in the value of…a substantial interest in the shares of Getty”.
Madam Justice Levine dealt with an appeal from a lower court decision striking out certain portions of the Statement of Claim in the case on the ground that the allegations and claims made in those portions disclosed no reasonable cause of action. Excerpts from her decision follow:
“The appellants do not contest the principle that a shareholder cannot claim a loss that is the direct result of wrongs to the company. They do not dispute that if the value of the shares of the company diminishes because of damage to the company, the loss in share value is “reflective” of the company’s loss. The appellants claim, however, that their loss is not reflective of a loss to Getty. The loss they claim is the loss of the value of their shares in the marketplace, which, they say, Getty could not claim. The appellants allege that the market forces which caused the fall in value of their shares are separate and independent from any losses which Getty may have suffered from the wrongdoings alleged. In other words, they deny that the loss in value of their Getty shares is a “reflective loss”.
The appellants argue that in Hercules, the Supreme Court left the door open to actions by shareholders, even where the corporation may also have a separate and distinct cause of action. Justice LaForest wrote (at para. 62):
One final point should be made here. Referring to the case of Goldex Mines Ltd. v. Revill (1974), 7 O.R. (2d) 216 (C.A.), the appellants submit that where a shareholder has been directly and individually harmed, that shareholder may have a personal cause of action even though the corporation may also have a separate and distinct cause of action. Nothing in the foregoing paragraphs should be understood to detract from this principle. In finding that claims in respect of losses stemming from an alleged inability to oversee or supervise management are really derivative and not personal in nature, I have found only that shareholders cannot raise individual claims in respect of a wrong done to the corporation. Indeed, this is the limit of the rule in Foss v. Harbottle. Where, however, a separate and distinct claim (say, in tort) can be raised with respect to a wrong done to a shareholder qua individual, a personal action may well lie, assuming that all the requisite elements of a cause of action can be made out…
The appellants say that the English cases provide other examples of cases where shareholders were allowed to bring claims in respect of wrongs also done to the companies in which they owned shares. They argue that new and novel approaches to legal principles should not be struck out at the pleadings stage, but should be allowed to proceed to trial to be tested on evidence and full argument.
The respondents’ answer is that under Canadian law the appellants have no claim, and that the English cases are at best equivocal about the circumstances in which a shareholder may be permitted to claim a loss in value of the shares of a company for wrongs done to the company…
The appellants suggest that Goldex Mines Ltd. v. Revill et al. (1974), 7 O.R. (2d) 216 (Ont. C.A.), mentioned in Hercules, supports their claim to a separate cause of action for a wrong done to Getty. In Goldex, the Ontario Court of Appeal considered the distinction between a personal action by a shareholder for a personal wrong and a derivative action brought on behalf of the corporation for a wrong done to the corporation. The Court pointed out that an action may be brought by several shareholders for the same personal wrong. It stated:
In Farnham v. Fingold, supra, this Court was not required, on the facts of that case, to consider a situation where the same wrongful act is both a wrong to the company and a wrong to each individual shareholder. In one sense every injury to a company is indirectly an injury to its shareholders. On the other hand, if one applies the test: “Is this wrongful act one in respect of which the company could sue?”, a shareholder who is personally and directly injured must surely be entitled to say, as a matter of logic, “the company cannot sue for my injury; it can only sue for its own.”
The converse is, of course, also true. Where the company is injured, an individual shareholder cannot sue for the company’s injury; the shareholder can only sue for its own. Loss reflective of a loss suffered by the company is not the shareholder’s personal loss.
There are good reasons for not allowing a shareholder to claim the loss in value of its shares where a wrong has been done to the company. As explained by Laskin J.A. in Meditrust (at para. 13); La Forest J. in Hercules (at para. 59), and McKenzie J. in Rogers at 78-81 (citing Prudential Assurance and Green v. Victor Talking Mach. Co., 24 F. 2d 378 (1928) (C.A. 2nd Circ.)), the rule avoids a multiplicity of actions. Further, and consistent with the legal theory of Foss v. Harbottle, the loss in value of shares of a company is a loss of all of the shareholders, not just one or some of them. There is no logic that would allow only one shareholder to claim that loss, where the claim relates to wrongs done to the company, and all of the shareholders have suffered the loss in value. A single shareholder cannot claim that the loss in value of the shares, per se, is a personal, direct loss…
Summary and Conclusion
The appellants’ arguments, based on the consideration of the rule in Foss v. Harbottle in other jurisdictions, does not reveal that the chambers judge made any error in striking out the portions of the Further Amended Statement of Claim. She did not apply the wrong test for striking pleadings; she considered whether the appellants had a reasonable cause of action, including a valid claim for damages. She applied binding Canadian law, which has been considered and affirmed in a persuasive judgment of the Ontario Court of Appeal in Meditrust. In both Rogers and Meditrust, shareholders claimed losses in the value of their shares as the result of an alleged conspiracy against them involving wrongs done to the company, and in both cases the claims were dismissed. The chambers judge did not decide, contrary to the appellants’ arguments, that a shareholder may never bring a claim for the diminution in the value of the shareholder’s shares, but confirmed, by reference to Hercules and Haig, that a shareholder may have a cause of action for loss in the value of shares where the shareholder has both an “independent relationship” with the wrongdoer and an “independent loss” from that of the company to whom the wrong has been done. She decided that in this case, the appellants had not shown that they have a cause of action for an “independent loss” in respect of wrongs done to Getty. I agree with her conclusion.”
TOPIC 5: DISTINGUISHING “OPPRESSION” CLAIMS & “DERIVATIVE” ACTIONS
As can be seen from the cases canvassed above it can be somewhat challenging to tell when a particular set of facts is appropriate for a derivative action and when a claim for oppression is the way to go. Because, as can be readily seen from the cases, these sorts of determinations by the courts are highly reliant on the facts and tend at the same time to be reluctant to impose hard an fast rules, you are legitimately entitled to some degree of confusion. That said a number of general distinctions between oppression claims and derivative actions can be divined (changes as always TBA by the courts).
The source of the following list is an excellent short article called “Distinguishing Oppression Claims and Derivative Actions” by Tracey M. Cohen, T. Mark Pontin, and Graeme Hooper which can be found here:
- Oppression claims are personal to the shareholder, while derivative claims involve harm to the company.
- The substantive standard for a finding of liability is different. The issue when it comes to oppression proceeding is whether a complainant’s reasonable expectation has been inequitably violated in an oppressive or unfairly prejudicial manner. A derivative action requires proof of a legal wrong.
- Oppression remedies are broad and flexible while those in derivative actions tend to be standard remedies tied to the precise cause of action.
- Timing: Oppression proceedings must be brought in a timely manner, while it is not particularly a factor when it comes to derivative actions.
- Costs: Generally speaking successful derivative action claimants will recover costs on a “solicitor-client basis, while successful oppression claimants will only recover tariffed costs.
- Leave of the court is required to commence a derivative action but not an oppression action.
- Oppression claim are generally commenced by way of court petition proceeding, while derivative claims are standard civil claims.
TOPIC 6: “WITH GREAT POWER…”
All of this fussing about with the rules of corporate law (as mundane or fascinating as you may find them) can be seen as missing a larger and more disturbing point. That is that the “product” of the practice of corporate law – corporations themselves – have been known to perpetrate dastardly deeds on a not insignificant number of occasions. More disturbing to the legal practitioner is that (arguably) on many of these occasions the lawyers involved were just doing their jobs, being creating companies or facilitating the legal continuation of a corporations existence, or the expression of its independent corporate personality. Surely we don’t bear responsibility for the nefarious outcomes that can flow from “limited liability”, separate corporate personhood, the lack of accountability of subsidiaries, or the politics of board/shareholder approvals? Or do we? Should we?
What follows are a series of sources to help remind you of the scandals and more importantly of the role lawyers and the law have in both contributing to the conditions which formed evil, and hopefully in constructively addressing those issues and the problems that they contributed to. As you review each, ask yourself:
- Were there lawyers around?
- What were they doing?
- Did they know things were going awry?
- Did they try and do anything about it?
A. Conrad Black
For some background on the Black saga, please read:
The Wall Street Journal Article entitled “Report Slams Hollinger’s Black For a ‘Corporate Kleptocracy’”, which you may find at: http://online.wsj.com/news/articles/SB109395499363105646
Please review but not read in detail: Catalyst Fund General Partner Inc. v. Hollinger Inc., 2004 CanLII 40665 (ON SC) http://canlii.ca/t/1j6qd
Please watch the BBC program “The Fall of Conrad Black” which you can find at http://www.youtube.com/watch?v=CIRRUvjkLJo
Finally, please read, “Law Society of Upper Canada appeals exoneration of two Conrad Black lawyers” at: http://www.thestar.com/news/gta/2014/01/10/law_society_of_upper_canada_appeals_exoneration_of_two_conrad_black_lawyers.html
B. Garth Drabinsky
Please read “Livent co-founders Drabinsky, Gottlieb convicted of fraud and forgery” here: http://www.cbc.ca/news/business/livent-co-founders-drabinsky-gottlieb-convicted-of-fraud-and-forgery-1.778879
Please read “Livent case turns spotlight on Canada’s undramatic whitecollar prosecutions” at: http://www.thespec.com/news-story/2272130-livent-case-turns-spotlight-on-canada-s-undramatic-white-collar-prosecutions/
Please read “Law society revokes Garth Drabinsky’s licence over fraud convictions” at: http://www.thestar.com/business/2014/07/17/law_society_revokes_garth_drabinskys_licence_over_fraud_convictions.html
Please read “The six most outrageous quotes from Garth Drabinsky’s day parole hearing” especially this: “I never directed anyone to cross over the line knowingly. I obviously did do that by the dynamic of my character—the force of my character coupled with my role in the organization.” The article can be found here: http://www.torontolife.com/informer/toronto-business/2012/10/29/garth-drabinsky-day-parole-quotes/#more-173802
C. Enron Corporation
Please be acquainted with “Lawyers, Ethics, and Enron” here. It is an important piece of perspective on what we actually do and ought to as lawyers:
http://www.thecorporatescandalreader.com/forms/04c%20rhode.pdf
FINALLY PLEASE READ:
Code of Professional Conduct for British Columbia, sections 3.2-3, 3.2-7, 3.2-8, 3.7, 3.3-1, 3.3-2. Available at: http://www.lawsociety.bc.ca/page.cfm?cid=2638&t=Chapter-3
UNIT WRAP UP:
We have arrived at the end of our course, so of course we begin again with a review of certain subjects in the hope of fortifying your knowledge as you prepare for the final exam.