Canada: When Can Directors Be Personally Liable For Oppressive Conduct? The Supreme Court Sets Out The Test

In Wilson v. Alharayeri, the Supreme Court of Canada determined when an order for compensation under section 241(3) of the Canada Business Corporations Act (CBCA) may properly lie against the directors of a corporation personally, as opposed to the corporation itself.

Mr. Alharayeri was the President, the Chief Executive Office, a director and a significant minority shareholder of Wi2Wi Corporation ("Corporation"). The Corporation began to seriously consider merging its operations with those of another business, Mitec Telecom Inc. ("Mitec"). While negotiating the merger, Mr. Alharayeri separately agreed to sell some of his common shares in the Corporation to Mitec. When the Board found out about this agreement, Mr. Alharayeri was censured for concealing the deal and failing to disclose the potential conflict of interest. Consequently, he resigned from his functions. Neither the merger nor the share purchase occurred. Afterwards, the Corporation decided to issue a private placement of convertible secured notes ("Private Placement") to its existing common shareholders. Prior to the Private Placement, the Board accelerated the conversion of Class C Convertible Preferred Shares ("C Shares"), beneficially held by an investment company for Mr. Wilson, into common shares. It did so despite doubts as to whether or not the financial test for C Share conversion had been met. However, Mr. Alharayeri's Class A and B Convertible Preferred Shares ("A and B Shares") were never converted into common shares, notwithstanding that they met the relevant conversion tests. In Board meetings, Mr. Wilson advocated against converting Mr. Alharayeri's A and B Shares on the basis of Mr. Alharayeri's conduct and involvement in the parallel share purchase negotiation. Consequently, Mr. Alharayeri did not participate in the Private Placement and the value of his A and B Shares and the proportion of his common shares were substantially reduced. This prompted him to file an application for oppression under s. 241 of the CBCA against four of the Corporation's directors, including Mr. Wilson.

Section 241(3) of the CBCA gives a court broad discretion to make an interim and final order it thinks fit before enumerating specific examples of permissible orders. However, the CBCA goes no further to specify when it is fit to hold directors personally liable under this section.

Determining the personal liability of director requires a two-pronged approach.

  • The first prong requires that the director must have exercised, or failed to have exercised, his or her powers so as to effect the oppressive conduct;
  • The second prong requires that the imposition of personal liability be fit in all the circumstances.

There are at least four general principles that should guide courts in fashioning a fit order under s. 241(3) of the CBCA.

  1. The oppression remedy request must in itself be a fair way of dealing with the situation. For example, it may be fair to hold a director personally liable where he or she has derived a personal benefit in the form of either an immediate financial advantage or increased control of the corporation, breached a personal duty or misused corporate power, or where a remedy against the corporation would unduly prejudice other security holders.
  2. Any order made under s. 241(3) of the CBCA should go no further than necessary to rectify the oppression.
  3. Third, any order made under s. 241(3) of the CBCA may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders.
  4. Fourth, a court should consider the general corporate law context in exercising its remedial discretion under s. 241(3) of the CBCA. Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances.

In the present case, the court concluded that Mr. Wilson was personally liable for the oppression for the following reasons. First, Mr. Wilson had played a lead role in Board discussions resulting in the non-conversion of Mr. Alharayeri's A and B Shares, and was therefore implicated in the oppressive conduct. Also, Mr. Wilson accrued a personal benefit as a result of the oppressive conduct. He was allowed to convert his C shares into common shares despite issues as to whether the test for conversion had been met, and this enabled him to participate in the Private Placement and increased his control over the Corporation. Furthermore, Mr. Alharayeri was awarded the difference between the value of his A and B Shares had they been converted into common shares, and the value of his A and B Shares prior to the Private Placement. This was deemed a remedy that went no further than necessary to rectify Mr. Alharayeri's loss. Finally, the remedy appropriately vindicated Mr. Alharayeri's reasonable expectations that his A and B Shares would be converted if the Corporation met the applicable financial tests laid out in the Corporation's articles, and that the Board would consider his rights in any transaction impacting the A and B Shares.

This case is an important reminder that directors can be held personally liable for oppressive conduct. Through this decision, the Supreme Court of Canada has also reinforced the approach that will be taken to determine whether or not personal liability will be imposed on a director when the oppression remedy is invoked.

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