Canada: Oppression In The Context Of A Closely Held Corporation: SCC Weighs In

In Mennillo v. Intramodal inc., the first oppression remedy case to reach the Supreme Court of Canada (SCC) since BCE Inc. v. 1976 Debentureholders, the SCC provided clarity on how the oppression remedy operates within closely held corporations and what will and will not be considered oppression under the Canada Business Corporations Act (CBCA). Blakes represented the appellant in the SCC.

BACKGROUND

Mr. Mennillo, the appellant, and Mr. Rosati were the sole shareholders and directors of Intramodal, a transportation company they set up in 2004. Mr. Mennillo held 49 shares, while Mr. Rosati held 51. Mr. Mennillo contributed the funds to start up the business while Mr. Rosati brought his skills and expertise.

On May 25, 2005, Mr. Mennillo resigned as director and officer of the company and signed a resignation letter to that effect. A number of months later, Mr. Rosati unilaterally adopted a resolution, backdated to May 25, 2005, by which Intramodal purportedly approved a verbal transfer of all of Mr. Mennillo's shares to Mr. Rosati. Mr. Mennillo never signed any document evidencing such a transfer, never endorsed his share certificate for that purpose, and was unaware of the backdated resolution.

The money advanced by Mr. Mennillo to Intramodal was repaid in its entirety between July 2006 and December 2009. It was not until the final payment was received in 2009 that Mr. Mennillo discovered that he was no longer an Intramodal shareholder. In September 2010, he commenced an oppression action against Intramodal to cancel the backdated resolution and be reinstated as a 49-per-cent shareholder. He argued that he was unlawfully removed from the list of shareholders and that he was frozen out of the corporation in a manner that was oppressive.

The trial judge considered the case a matter of credibility. According to the judge, an essential consideration of Mr. Mennillo becoming a shareholder of Intramodal was his (verbal) agreement to guarantee the company's debts. The judge found that when Mr. Mennillo resigned as a director in May 2005, he also informed Mr. Rosati that he was no longer willing to guarantee the company's debts, and thus agreed to transfer his shares to Mr. Rosati.

Mr. Mennillo appealed, denying that any such verbal transfer of shares ever occurred and adding that, in any event, it would be null and void for all legal intents and purposes because, under both corporate law and Quebec civil law principles, this alleged share transfer agreement was never evidenced in writing. The Quebec Court of Appeal doubted that any such verbal transfer of shares occurred, yet it dismissed Mr. Mennillo's appeal, finding that he and Rosati would have agreed in May 2005 to "retroactively cancel" the initial issuance of Mr. Mennillo's shares.

DECISION

The SCC was unanimous in dismissing the Court of Appeal's conclusion that Messrs. Mennillo and Rosati verbally agreed to retroactively cancel the issuance of shares to Mr. Mennillo. It is not possible, the SCC ruled, to retroactively cancel an issuance of shares by way of a verbal agreement. An issuance of shares may only be cancelled by amending the corporation's articles or by the corporation formally purchasing its shares by way of a resolution of the directors, an express consent of the shareholder, and by meeting the applicable solvency and liquidity tests. The statutory requirements regarding the maintenance of share capital are not optional, given that the share capital is the common pledge of the creditors.

That said, the majority of the SCC found that there was no overriding and palpable error in the trial judge's findings of fact. Thus, the SCC accepted that a verbal agreement was entered into between Messrs. Mennillo and Rosati whereby Mr. Mennillo only remained a shareholder so long as he agreed to guarantee the debts of Intramodal, that Mr. Mennillo did not wish to remain a shareholder in 2005 and that, as such, he could have had no reasonable expectation that he would.

On Intramodal's failure to comply with corporate law formalities in registering an alleged verbal transfer of shares, the SCC reaffirmed that oppression is judged according to "business realities", not "narrow legalities". The majority commented that "sloppy paperwork on its own does not constitute oppression," particularly in the case of a closely held corporation. Furthermore, the majority held that Mr. Mennillo was aware of the company's failure to observe certain statutory formalities for more than three years and was thus beyond the limitation period for his claim.

In a strongly-worded dissent, Justice Côté wrote that the findings of the majority violate two fundamental principles of corporate law: that a corporation's personality is distinct from that of its shareholders, and that a corporation's capital must be maintained. In regards to corporate personality, Justice Côté commented that the existence of a verbal agreement between two shareholders does not amount to an agreement with the corporation on the terms of withdrawal of a shareholder. She added that Mr. Mennillo's alleged intention to cease being a shareholder did not extinguish his reasonable expectation that he would remain a shareholder until further appropriate steps were taken. The expression of his intention was at most an invitation to contract: no meeting of the minds had occurred with Mr. Rosati as to the nature of the contract and its essential elements. Justice Côté further noted that compliance with corporate law formalities is an implied reasonable expectation of a shareholder. In contrast to the majority, she determined that Mr. Rosati used his position as majority shareholder to strip Mr. Mennillo of his status as a shareholder in an oppressive and unlawful manner.

IMPLICATIONS

While in this case failure to comply with corporate law formalities did not amount to oppression, the majority of the SCC did not rule out that failure to comply could constitute oppression in certain cases. Where corporate law formalities have not been complied with, shareholders should consider also pursuing claims under sections 247 (compliance order) or 243 (rectifying of records) of the CBCA, which provide a remedy for failure to comply with the legislation that does not rely on a violation of the applicant's "reasonable expectations".

Shareholders should also exercise caution when entering into collateral agreements, whether verbal or written. This decision creates potential that collateral shareholder agreements may be read as synonymous with an agreement between a shareholder and the corporation.

The authors acknowledge the contribution of Caitlin McIntyre (Student-at-Law).

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
23 Nov 2018, Other, Toronto, Canada

Cybersecurity, including data privacy and security obligations, has become a critical chapter in every company’s risk management playbook.

28 Nov 2018, Speaking Engagement, Toronto, Canada

Arbitration has a number of advantages and some disadvantages for the resolution of domestic and international commercial disputes.

Similar Articles
Relevancy Powered by MondaqAI
Bennett Jones LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Bennett Jones LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions