When a shareholder or “an appropriate person” feels that the affairs of a company are being conducted in a manner that is oppressive, or that an act of the company done or threatened is unfairly prejudicial, that person may make an application for a remedy pursuant to section 227 of British Columbia’s Business Corporations Act. This is known as the oppression remedy. If successful, the court makes any order it considers appropriate, which may include an order appointing or removing a director, an order directing a shareholder to purchase the shares of another shareholder, or an order directing that the company be liquidated and dissolved. The flexibility of the oppression remedy makes it a powerful tool for protecting a person’s interests.
Shareholder disputes are varied but in closely held companies they often result from a breakdown in the personal relationship between the shareholders. The parties are required to seek the court’s assistance because there is no mechanism either in the company’s articles of incorporation or by way of a shareholders’ agreement to remedy the situation. The types of disputes that are commonly before the courts, include:
- Shareholders who are family members, with historical grievances, allow personal matters to effect the operation of the company;
- A shareholder is precluded from participating in the management of the company when he or she expected to do so;
- A shareholder takes action or causes the company to take action that is not in its best interest;
- Shareholders fundamentally disagree on the vision and direction of the company and cannot find common ground; and
A shareholder wants to realize on his or her investment in the company while others want to maintain the status quo. Oppression claims are assessed in a two-step inquiry. The first step is to determine the parties’ reasonable expectations in a contextual and objective analysis. In determining the reasonable expectations, consideration is given to the general commercial practice, the nature of the corporation, the relationship between the parties, and past practice. The second step is to determine whether those reasonable expectations were violated to such a degree that the conduct amounts to oppression or unfair prejudice.
Not every unmet expectation gives rise to an oppression claim. In Alleluia v. Wilson, 2011 BCSC 666, Justice Armstrong held that the failure of the company to follow basic corporate governance requirements did not amount to oppression. In Boffo Family Holdings Ltd. v. Garden Construction Ltd., 2011 BCSC 1246, Justice Goepel held that the removal of a minority shareholder as a director did not amount to oppression because there was evidence that the minority shareholder was moving towards full retirement and was no longer going to be actively involved in the company’s activities. But even in cases where the conduct complained of falls short of being oppressive or unfairly prejudicial, a court may still fashion a remedy pursuant to section 324 of the Business Corporations Act if it is “just and equitable” to do so. There are four separate ways of triggering a “just and equitable” remedy pursuant to section 324:
- loss of substratum;
- justifiable lack of confidence;
- deadlock; and
- the partnership analogy.
There is a “loss of substratum” when the purpose for which the company was formed has been exhausted. For example, in Alldrew Holdings Ltd. v. Nibro Holdings Ltd., 1993 CanLII 5509 (ON SC), it was held that there was a loss of substratum when a company incorporated to manufacture, purchase, and sell starch and starch by-products ceased its manufacturing activities. For there to be a “justifiable lack of confidence”, the lack of confidence must be grounded on conduct in regard to company’s business. Merely being dissatisfied at being outvoted on the business affairs of the company does not constitute a justifiable lack of confidence. A “deadlock” is when the normal operations of a corporation are being paralyzed or seriously interfered with. The classic situation is demonstrated in Boffo Family Holdings. In that case, one of the corporations had only two shareholders, each of whom owned 50% of the shares. The shareholders could not agree with respect to the management of the company and there was no meaningful way to break the deadlock. Justice Goepel ordered a shotgun arrangement so that one shareholder could buy out the other shareholder, and thereby break the deadlock. The “partnership analogy” triggers when there exists something more than a purely commercial relationship between the parties; the relationship must be formed or continued on the basis of a personal relationship involving mutual confidences. If the aggrieved shareholder can demonstrate a basic underlying obligation that if broken, the association must be dissolved, then the courts will find it just and equitable to do so. The leading case on the partnership analogy is Ebrahimi v. Westbourne Galleries Ltd., [1972] 2 All E.R. 492 (H.L.). In that case, two individuals created a partnership to sell carpets. They had an equal share in the management and profits of the partnership. The partnership was later incorporated, and an extra partner, the son of one of the original two individuals, was added. When the business relationship between the individuals deteriorated, father and son voted the other partner out of his office as director. The courts stepped in and held that it would be “just and equitable” for the courts to fashion a remedy for the excluded shareholder. These cases demonstrate the court’s ability to fashion remedies for non-controlling shareholders who are being oppressed or unfairly prejudiced, or who are in situations where just and equitable considerations arise. The cases also highlight the importance of planning ahead and preparing documents, such as shareholders agreements, to deal with problems before they arise. The above is a brief summary of the law. As you will appreciate each circumstance can differ on the facts involved in each particular case. We encourage you to consult with a lawyer should you have any questions or concerns regarding shareholder disputes.
Christopher Martin
Partner in Corporate/Business Law
Lindsay Kenney – Vancouver Office