The Supreme Court of Canada has clarified and confirmed the principles of oppression remedy in a Quebec case that pitted a onetime company president against current directors after the former saw the proportion and value of his corporate shares reduced.
“I think the [Supreme] court reaffirmed the idea that … the oppression remedy is a broad remedy, [meant to be] applied flexibly by a trial judge, taking into account the particular circumstances of any case,” Douglas Mitchell of Irving Mitchell Kalichman LLP in Montreal and lead counsel for the respondent, told Legal Feeds.
The respondent had been president and CEO of Wi2Wi Corporation before resigning his positions over non-disclosure and conflict-of-interest issues during an attempted corporate merger. The appellant, a member of Wi2Wi’s board, then became its new president and CEO.
Later, the board decided to issue a private placement of convertible secured notes to its existing common shareholders. Before the private placement, the board accelerated the conversion of Class C Convertible Preferred Shares, beneficially held by an investment company for the appellant, despite doubts as to whether the financial test for C Share conversion had been met. In board meetings the appellant and another director advocated against converting the respondent’s A and B shares, although they did meet the relevant conversion tests, on the basis of the respondent’s prior conduct as president; this meant that he did not participate in the private placement and the value of his A and B Shares and proportion of his common shares in Wi2Wi were substantially reduced. The respondent then filed an application under s. 241 of the Canada Business Corporations Act for oppression against four of Wi2Wi’s directors, including the appellant.
The trial judge held the appellant and another director solidarily liable for the oppression and ordered them to pay compensation to the respondent. In dismissing the appeal, Quebec’s Court of Appeal held that the imposition of personal liability was justified.
Mitchell says he argued that a court being able to order a remedy as it saw fit was consistent with the wording of the CBCA statute and its oppression remedy. “I think the appellants were trying to construct barriers and limitations on the circumstances in which the courts could develop remedies, and the SCC rejected that approach,” he says. “They tried to establish a test, … a series of factors that must be present in all cases before you can determine that directors should be liable. Ultimately, the SCC said that position is inconsistent with the purpose of this statute.”
“Section 241(3) [the oppression remedy] of the Canada Business Corporations Act gives a trial court broad discretion to ‘make any interim or final order it thinks fit,’ ” Justice Suzanne Côté wrote for the court.
“[T]he Act’s wording goes no further to specify when it is fit to hold directors personally liable under this section. As stated in the leading decision, Budd v. Gentra Inc. (1998), 43 B.L.R. (2d) 27 (Ont. C.A.), determining the personal liability of director requires a two pronged approach. First, the oppressive conduct must be properly attributable to the director because of his or her implication in the oppression. Second, the imposition of personal liability must be fit in all the circumstances.”
At least four general principles should guide courts in fashioning a fit remedy under s. 241(3) of the CBCA, Justice Côté wrote. “First, the oppression remedy request must in itself be a fair way of dealing with the situation. … Second, any order should go no further than necessary to rectify the oppression. Third, any order may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. And fourth, a court should consider the general corporate law context in exercising its remedial discretion.”
In its decision, the Supreme Court “fleshed out a bit what Budd v. Gentra had set out,” says Mitchell, suggesting that the status quo has worked well until now.
“Directors do take on risks when they assume a directorship. They cover off those risks through an indemnity of the corporation, they cover them off through insurance, and commerce still moves along just fine.”