Canada: Private Company Oppression Remedies Now On Sale In Ontario

In a surprising ruling from Ontario's highest court, the Ontario Court of Appeal has held that a shareholder, in selling his shares in a private company to a third party, may also sell any of his outstanding oppression remedy claims with those shares. While one might have assumed that such a legal proposition would be axiomatic, it must be remembered that oppression remedy claims are grounded in "reasonable shareholder expectations" and have often been viewed as personal to the shareholder so as to be beyond automatic assignability. Furthermore, the courts have historically refused to permit the assignment of causes of action that "savour of maintenance and champerty" (i.e. officious intermeddling in litigation, usually where the assignee has no real interest in the dispute in question). However, in Ma v. Ma, 2012 ONCA 408 (Can LII), the Ontario Court of Appeal has made it clear that existing oppression remedy claims that are personal to the shareholder may indeed be assigned with a shareholder's private company shares for as little as $1.00.

In Ma v. Ma, Ying Ma ("Ying"), who was a friend of Sao Nam Kam ("Kam") and who had taken an assignment of his shares and causes of action, sought to amend an oppression action originally commenced by Kam against Jeffrey Ma ("Jeffrey"), Ying's brother, and others pertaining to the affairs of an Ontario private company. In the initial Statement of Claim issued by Kam, Kam alleged that Jeffrey engaged in oppressive conduct by failing to pay Kam profits made by the company and by failing to provide Kam with financial reports from the time of his initial investment. After the Statement of Claim was issued and pursuant to an assignment agreement, Ying took an assignment of Kam's 40% shareholder interest in the company along with all causes of action arising therefrom, including those asserted in Kam's existing claim, for $1.00. At the time of the assignment to Ying, there were existing court orders requiring Kam, who was living overseas, in poor health and unable to travel, to attend in Ontario for discovery, failing which his claims would be dismissed with costs. In fact, such state of affairs was expressly referenced in the assignment to Ying and was presumably the impetus for the assignment (i.e. to permit Ying to "step into the shoes" of Kam and avoid the dismissal of the action should Kam not be able to attend for discoveries, as ordered by the court). 

At first instance, a single judge of the Ontario Superior Court of Justice refused to permit the amendment of the claim to permit Ying, as assignee, to assert the causes of action initiated by Kam. While the judge acknowledged that Kam was free to assign the proceeds of his oppression claim, the judge found that he could not assign the rights to pursue the action as it was a personal claim of Kam that could not otherwise be legally assigned. Put another way, the judge found that Ying, as a current shareholder, was not entitled to maintain an oppression action alleging that Kam was oppressed in the past.  The judge also found that permitting Ying to seek an oppression remedy that really belonged to Kam would result in a windfall for Ying. On appeal to the Ontario Divisional Court, the Divisional Court dismissed Ying's appeal and upheld the decision of the judge at first instance.

On further appeal to the Ontario Court of Appeal, however, the Ontario Court of Appeal allowed Ying's appeal and found that she was entitled, as assignee, to amend the Statement of Claim to assert Kam's pre-existing oppression claims. In its analysis, the Ontario Court of Appeal held that there are 2 categorical exceptions to the rule prohibiting assignment of causes of action based on concerns of maintenance and champerty, as follows:

  1. where the cause of action to be assigned is ancillary to a property interest that has also been assigned (in which case there is no requirement that the property interest in favour of the assignee pre-exist the assignment in order for the assignee to enforce the ancillary cause of action); and
  2. where the assignee of the cause of action has a genuine commercial interest in taking the assignment (in which case the commercial interest must pre-exist the assignment to the assignee and not arise from the assignment itself).

Ultimately, the Ontario Court of Appeal found that the assignment of Kam's pre-existing oppression claims to Ying satisfied the first of the 2 exceptions above, namely that the assignment of the cause of action was ancillary to the assignment of Kam's shares themselves. The appellate court also distinguished various legal authorities where it was previously held that shareholders of public companies could not pursue an oppression remedy for pre-existing and publicly disclosed events as that would result in a windfall (on the theory that the purchase price for the public company shares had already reflected the past oppression at the time of purchase) and would also be beyond the "reasonable expectations" of the shareholder who purchased public company shares with knowledge of such events. In this case, the appellate court noted that "while a successful oppression remedy might be viewed as a windfall to (Ying) because she only paid $1, she has assumed the risk of the litigation and she might come away with nothing. It is not for this court to decide whether the bargain struck between Kam and (Ying) was an appropriate one. There is no double recovery or windfall here.  (Ying's) claim does not savour of maintenance".

In short, Ontario's highest court has endorsed the sale of pre-existing oppression remedy claims with private company shares for as little as a buck. In so doing, the court has not only opened up the market to those individuals who would previously have been presumed to be officious intermeddlers, it has done so at bargain basement prices!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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