In a recent unanimous decision, the Québec Court of
Appeal warned courts seized with requests for oppression remedies
under the Canada Business Corporations Act (the CBCA) of
the dangers of holding venture capital funds solely responsible for
the risks associated with their investments in start-up
In the case at hand, Garage Technology Ventures Canada, S.E.C. et
al. v.Légeret al., 2012 QCCA
1901, the founder of a debt-ridden company in need of venture
capital financing to survive, signed a contract to carry on
business under a new corporate structure, financed by a majority
shareholder venture capital fund whose representatives also acted
as directors of the company. Osler was successful in convincing the
Québec Court of Appeal that the founder could not
successfully seek an oppression remedy simply because, despite
their best efforts to redress the company and the sums invested by
the fund, the directors and officers of the company were unable to
make it succeed. This was especially true in this case where, when
the company was closed, the fund had paid off all debts for which
the founder was personally liable and had offered to the founder to
take back the intellectual property that the company had developed
in the course of its operations. The fact that the company was
closed after only a few months of operations was not considered as
evidence of oppression by the court, but simply as an exercise of
business judgment in the particular context of a start-up
The standard of care to which directors and officers of start-up
companies are held must be analyzed in the specific context of
venture capital investments, where the company's survival may
depend on important additional injections of capital. Directors and
officers must strive to make their business succeed, in the short
term, but they cannot be expected to act as they would in a
financially sound and mature company. The Court of Appeal stated
that the first instance judge should have taken into account that
venture capital funds are not traditional financing institutions,
which often commit to longer term investments. Courts must
determine in concreto whether the directors and officers
acted reasonably in the course of their mandate, in light of the
speculative nature of start-up companies.
According to the court, to conclude otherwise would amount to
imposing disproportionate obligations on the shoulders of directors
and officers of start-up companies, and would run against the
principles of equity that must govern oppression remedies under the
CBCA, by creating a new injustice.
Interestingly, the Québec Court of Appeal did however
uphold the first instance judge's conclusion that the founder
was a "complainant" under the CBCA, despite the fact that
she had not exercised her options to become a shareholder of the
company. This was explained by the fact that the parties had always
intended for the founder to be a minority shareholder, and that the
option structure was put in place merely to avoid frightening
potential future investors who may have been reluctant to invest in
a company owned in part by someone having historically managed
businesses in deficit. In such circumstances, the court ruled that
the founder was the beneficial owner of shares of the company.
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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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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