Canada: The Oppression Remedy: Greater Risk Of Personal Liability For Directors And Officers

In the recent decision of Wilson v Alharayeri,1 the Supreme Court of Canada unanimously found that directors and officers of a corporation can be personally liable for corporate oppression pursuant to section 241 of the Canada Business Corporations Act ("CBCA"). In doing so, Cóté J., writing for the Court, clarified the test for when personal liability may be imposed on corporate directors for oppression.

Ultimately, this decision broadens the application of the oppression remedy and exposes corporate directors and officers to a greater risk of personal liability.

Facts

The Respondent, Ramzi Mahmoud Alharayeri, was the President, the Chief Executive Officer, a significant minority shareholder, and a director of Wi2Wi Corporation (the "Corporation). While the Corporation was in the process of negotiating a merger with another business, the Respondent entered into a private agreement to sell some of his shares in the Corporation to the same business.2 The Board of the Corporation reprimanded the Respondent for concealing the private agreement, causing the Respondent to resign as President, CEO, and director.3 The Appellant, who was another director of the corporation, became the Corporation's President and CEO.4

The Board subsequently decided to issue a private placement to its common shareholders. This private placement had the effect of diluting the proportion of common shares held by any shareholder who did not participate in it.5 Before the private placement, the Board accelerated the conversion of Class C preferred shares held by the Appellant into common shares even though the financial test for share conversion had not been met.6 However, the Board refused to allow the Respondent to convert his Class A and Class B preferred shares into common shares, even though they met the applicable financial test.7 As a result of the private placement, the Respondent's proportion of common shares was significantly reduced.8 The Respondent filed an application for oppression under section 241 of the CBCA against four of the Corporation's directors, including the Appellant and the chair of the audit committee.9

The Quebec Superior Court found that the Appellant and the audit committee chair were personally liable for refusing to convert the Respondent's Class A and B shares, and for prejudicing his rights as a shareholder through the private placement.10 The trial judge awarded the Respondent $648,310 in compensation.11

The Quebec Court of Appeal upheld the findings of the trial judge. The Court concluded that personal liability was justified because the Appellant and the audit committee chair played a lead role in advocating against the conversion of the Respondent's shares.12

On appeal to the Supreme Court of Canada, the issue was whether the trial judge exercised the appropriate remedial discretion under the CBCA by holding the Appellant personally liable for oppression.13

Principles for Imposing PersonalLiability on Directors

The Supreme Court of Canada affirmed the established two-pronged test for personal liability of directors outlined in Budd v Gentra Inc.14 Under the Budd test, directors can be held personally liable for oppression where: (1) the oppressive conduct is properly attributable to the director because he or she is implicated in the oppression; and (2) the imposition of personal liability constitutes a "fit" remedy considering all the circumstances.15

The Supreme Court also outlined four guiding principles that courts should utilize to fashion "fit" orders under section 241(3) of the CBCA:

  1. The oppression remedy request must be in itself a fair way of dealing with the situation. This may be the case in situations where: (1) directors have derived a personal benefit; (2) directors have increased control of the corporation; (3) directors have breached a personal duty they owe as directors; (4) directors have misused corporate power; or (5) a remedy against the corporation would unduly prejudice other security holders.16
  2. The order must go no further than necessary to rectify the oppression. The goal of the order should be to correct the injustice between the parties.17
  3. The order may only serve to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. It may not respond to expectations arising by virtue of personal relationships and may not serve a purely tactical purpose.18
  4. The court should consider the general corporate law context in exercising remedial discretion. This means that director liability cannot be a substitute for other forms of relief, particularly where other forms of relief may be more appropriate in the circumstances.19

However, the Court cautioned that fashioning a fit remedy is a fact-dependent exercise and that the four principles outlined above should serve as illustrative guideposts and not a closed set of criteria.20

Application to this Case

Applying the principles outlined above, the Supreme Court upheld the trial judge's decision to impose personal liability on the Appellant for oppression. The Court found that the oppressive conduct was attributable to the Appellant because he, along with the chair of the audit committee, played the "lead role" in refusing to convert the Respondent's Class A and B shares.21 The Court also found that personal liability was fit in the circumstances because, as a consequence of his oppressive conduct, the Appellant increased his control over the Corporation to the detriment of the Respondent.22 Moreover, the Court stated that the remedy went no further than necessary in rectifying the Respondent's loss and was fashioned to vindicate the Respondent's rights as a Class A and B shareholder.23

Conclusions and Implications

The Supreme Court in Wilson v Alharayeri established a framework for determining when to impose personal liability on directors for oppression and confirmed that the oppression remedy remains a flexible remedy in the appropriate circumstances. This decision also confirms that there is now a broader application of the oppression remedy and greater personal exposure of directors and officers to liability for oppressive conduct. In the future, directors and officers will have to be more forthright in their dealings with the corporation or will risk being held personally liable for oppression. This case strongly emphasizes the need of directors to be wary of and always declare conflicts of interest. Furthermore, this decision can assist counsel in advising on whether a director or officer will be held personally liable for oppression in future cases.

Footnotes

1. 2017 SCC 39 [Wilson].

2. Supra note 1, para 6.

3. Ibid.

4. Ibid, para 7.

5. Ibid, para 9.

6. Ibid, para 10.

7. Ibid, para 11.

8. Ibid, para 13.

9. Ibid.

10. Ibid, para 14.

11. Ibid, para 16.

12. Ibid, para 19.

13. Ibid, para 25.

14. 43 BCLR (2d) 27 [Budd].

15. Supra note 1, paras 47-48.

16. Ibid, para 49.

17. Ibid, para 53.

18. Ibid, para 54.

19. Ibid, para 55.

20. Ibid, para 50, 56-57.

21. Ibid, para 60.

22. Ibid, para 62-63.

23. Ibid, para 65-67.

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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