— Hartley R. Nathan, QC, and Jessica Thrower, both of Minden Gross LLP2

Introduction

In an earlier issue we discussed how shareholders go about removing a director of a corporation pursuant to s. 109(1) of the Canada Business Corporations Act ("CBCA")3 or s. 122(1) of the Ontario Business Corporations Act ("OBCA").4 In this Article we will discuss some of the options available to a director who has received notice of a shareholders' meeting called for the purpose of removing him or her from the board. Under both Acts, the director is entitled to receive notice of, attend, and speak at such meeting of the shareholders. Additionally, there are two main options available to the director who wishes to oppose his or her removal from the board: (1) submitting a written statement to the shareholders and (2) initiating litigation under the oppression remedy.

1. Statement of Director

Both Acts provide such a director with the opportunity of submitting a written statement to the shareholders giving reasons opposing the proposed removal. Upon receiving a statement from the targeted director, the corporation is required to send a copy of the statement to every shareholder entitled to receive notice of a meeting of the shareholders or include the statement in a management information circular for the meeting. This opportunity provides the director to have his or her voice heard by all of the shareholders of the corporation. Attached to this Article as a Schedule is a form of written statement that contemplates a situation where a father and son who act as directors of a family run corporation have a falling out and the father, as the sole shareholder, wishes to remove the son as a director.

2. Other Option - Oppression Remedy

If the shareholder(s) vote by way of ordinary resolution, to remove the targeted director it is always open for the director to initiate litigation using the oppression remedy in circumstances where conduct has been oppressive, unfairly prejudicial to or unfairly disregards their reasonable expectations and interests.

The OBCA and CBCA5 provide that a complainant may apply to a court for an order under the oppression remedy if the court is satisfied that in respect of a corporation or any of its affiliates:

  1. any act or omission of the corporation or any of its affiliates effects a result;
  2. the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted in a manner; or
  3. the powers of the directors of the corporation or any of its affiliates are or have been exercised in a manner that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer, the court may make an order to rectify the matters complained of.

In Civelli v. Pacific Hunt Energy Corp.,6 two shareholders, who were also directors of the respondent corporation, commenced an action seeking, among other things, to be reinstated as directors of the corporation. The plaintiffs were abruptly removed as directors after they had commenced an action seeking an interlocutory injunction restraining the corporation and other directors from withholding financial information and from committing to a proposed financing transaction. Following the initiation of the litigation, the remaining shareholders voted to remove the plaintiffs as directors.

In considering whether the removal of the plaintiffs from the board was oppressive, the court determined that the plaintiff's expectations were reasonable. The court found that the affairs of the respondent corporation and the other shareholders were "conducted in a one-sided manner" and were oppressive to the plaintiffs. As a result, the court made an interlocutory order that the plaintiffs be reinstated as directors of the board.

Summary

While a director may submit a written statement to the shareholders or initiate litigation under the oppression remedy, there is no guarantee that they will be able to successfully oppose the proposed removal from the board. In the event a director is removed, the director should file a notice with Corporations Canada or a Form 1 with the Ontario Corporations Branch (as the case may be) to avoid future liability as a director.

Footnotes

1 This article is an update from the version in the May 2016 issue of the Directors' Briefing.

2 The authors wish to acknowledge the assistance of Alex Katznelson, student-at-law at Minden Gross LLP, for his assistance in the preparation of this article.

3 RSC 1985, c.C-44.

4 RSO 1990, c.B.16.

5 RSC 1985, c. C-44, s. 241, RSO 1990, c.B.16, s. 248.

6 2015 BCSC 1051.

To view the full article, please click here

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.