Private corporations sometimes do not strictly observe corporate
law requirements regarding annual shareholders' proceedings and
corporate governance. Non-compliance can be uneventful. However,
changing shareholder relationships can highlight potential
problems, as was illustrated by a recent case involving a family
Melflor Investments Ltd. v. Naim Investments Ltd., 2013
ONSC 6538, is an oppression remedy case. Naim was founded by three
first cousins: Gerald, Stanley, and Melvyn. Chaim, the family's
long-time accountant and trusted adviser, was given 10 percent of
the shares. It seems that the remaining 90 percent was owned in
equal proportions by the three branches of the family represented
by the three first cousins.
The first crack in family relations occurred after the death of
Stanley's brother. The deceased brother's shares were
purchased by a member of Gerald's family, rather than
Stanley's. This purchase significantly changed the
proportionate shareholdings: Gerald's family became a 45
percent shareholder, Melvyn's family held its 30 interest, and
Stanley's family held only 15 percent.
It appears that the number of directors of Naim was fixed at
seven. There were two representatives from each family plus Chaim,
the non-family or independent person. When the shareholdings
changed after the death of Stanley's brother, there was no
change in the composition of the board of directors. In fact, no
shareholders' annual meetings or directors' meetings were
held after that time. When the subsequent deaths of Melvyn and his
wife resulted in vacancies on the board of directors, no
shareholders' meetings were held to address the matter.
Finally, Chaim died, and only four directors remained (Gerald,
Stanley, and their wives).
Three years later, Chaim's estate wanted to sell its shares
and was introduced to a friend of Gerald's family. The friend
offered to buy the 10 percent interest held by Chaim's estate.
Stanley objected because he seemed to be of the view that the
friend was under Gerald's influence and that such a sale would
result in Gerald having control of Naim. Stanley and Gerald had
agreed that neither of them would have control of the corporation,
but there was no binding shareholders' agreement to this
effect. The only restriction on the sale of shares was that a
transfer of shares required the consent of the board of directors.
However, the board consisted of only four members, and, although
this was likely a quorum, the board was deadlocked between
Gerald's family directors and Stanley's family
In accordance with the procedures in the Ontario Business
Corporations Act (OBCA), Gerald requisitioned an annual
general shareholders' meeting to elect directors and address
other matters. He then entered into a voting agreement with
Chaim's estate, whereby Chaim's estate agreed to vote for
the slate of directors put forward by Gerald. Such a voting
agreement is permitted under the OBCA.
In combination, Gerald's family and Chaim's estate held
over 50 percent of the shares of Naim, and, as a result,
Gerald's nominees were elected as directors over Stanley's
objections. The board of directors approved the transfer of shares
by Chaim's estate to the purchaser.
Stanley claimed oppression. The court examined Stanley's
reasonable expectations and expressly noted that there had been no
attempt to regularize the board of directors over a 10-year period,
notwithstanding a number of deaths. The court held that Stanley
could not establish that he had a reasonable expectation either
about family representation on the board or about the continued
existence of an independent non-family board member. Therefore, his
claim was denied.
Pursuant to the OBCA, a change in the number of directors
typically requires a special resolution of shareholders, involving
a two-thirds majority vote. Family board representation should
therefore have been raised once Gerald's family became the 45
percent shareholder. If attention had been paid to corporate
governance requirements on an ongoing basis, Stanley might have
been in a better position when attempting to justify his
expectations about the composition of the board. Additionally, some
board vacancies could have been filled while Chaim was alive and
acting in the capacity of independent adviser.
Originally published by STEP Inside on January 2014,
Volume 13 No. 1
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