Canada: The Supreme Court Reiterates The Distinction Between A Shareholder's Right Of Action And The Corporation's Right Of Action

Last Updated: January 14 2019
Article by Vincent Cérat Lagana and Maria Braker

The Supreme Court of Canada has reiterated the distinction between a corporation's right of action and its shareholders' right of action. This nuance has an impact on the question of whether a party has sufficient interest to act, which is an essential requirement of any legal action.

Introduction

In the recent decision in Brunette v. Legault Joly Thiffault,1 the Supreme Court of Canada pointed out that the shareholders of a corporation do not automatically possess a right of action in relation to faults committed against the corporation in which they hold shares and in relation to the injury suffered by the corporation. In so holding, the Court gave its opinion on the sufficient interest that is required in order to bring an action and on the criteria that apply to a motion to dismiss for lack of sufficient interest.2

The Hon. Justice Rowe, writing the reasons for the eight-judge majority of the Court, stated the opinion that the Superior Court and Court of Appeal of Quebec were correct to dismiss the plaintiff's action for lack of sufficient interest. The Hon. Justice Côté dissented.

Facts

The appellants were the trustees of Fiducie Maynard 2004 (Fiducie), which was the sole shareholder of 9143-1304 Québec inc. (9143). 9143 was a holding company that owned shares in various corporations that made up Groupe Melior. Until 2010, Groupe Melior owned, renovated and operated seniors' residences.3

In the late 2000s, the success of Groupe Melior "was cut short by two events".4 It was the victim of fraud committed by a vice-president. In addition, Revenu Québec issued unexpected notices of assessment that resulted in the bankruptcy of several of the Groupe Melior corporations, of 9143 and of Mr. Maynard.5 This caused the total loss of value of the patrimony of Fiducie since it was comprised exclusively of shares in 9143.6

The appellants commenced an action against the professionals, accountants and lawyers, who had participated in setting up the tax structure of Groupe Melior. They believed that the professionals had breached their duty to advise Fiducie, since the tax structure violated the law and exposed the corporations to unexpected tax liability that led to the bankruptcies.7 The principal claim was for $55 million, calculated based on the net value of the Groupe Melior residences before the bankruptcies.8

Judgements Below

The respondents asked the Superior Court to dismiss the action under article 165(3) of the former Code of Civil Procedure (C.C.P.), which corresponds to article 168(3) of the present C.C.P. The respondents argued that Fiducie did not have a sufficient interest to bring a claim since the faults alleged were committed against the Group Melior corporations and not Fiducie. In their submission, the right of action belonged solely to the corporations of Groupe Melior.9

The Hon. Justice Danielle Mayrand of the Superior Court allowed the motion to dismiss and put an end to the action.10 The action was based on the lost value of the assets of Groupe Melior and Fiducie had no cause of action11 in relation to faults committed against the corporation by a third-party defendant. Shareholders only have a cause of action if a distinct legal obligation owed to them was breached and they suffered an injury distinct from those suffered by the corporation.12 Justice Mayrand did not identify any distinct fault committed against Fiducie, or any distinct injury suffered by Fiducie, in the allegations in the Motion to Institute Proceedings.13

The Court of Appeal of Quebec (Morrissette, Bich and Hogue JJ.A.) unanimously agreed with Justice Mayrand.14

Reasons Of The Majority Of The Supreme Court

Concept of sufficient interest

Since the ground for dismissal upheld by the Superior Court was the lack of sufficient interest, the majority of the Supreme Court of Canada first considered that concept in Quebec civil procedure.15

The Court noted that in order for an interest to be sufficient, it must be "legal, direct, personal, acquired and existing".16 In an action in civil liability like the one in this decision, sufficient interest is tied to the injury. Citing Bou Malhab,17 the Court stated that "to have the necessary interest to bring an action, a person must have sustained personal injury".18

Sufficient interest is a necessary condition of the admissibility of an action, and that interest must be established by the claimant, by a precise statement of facts.19 Article 165(3) C.C.P. (now 168(3)) provides the procedural basis for the defendant to move for dismissal of the claim at the stage of preliminary motions.20

The Court stated that in an action for liability, a challenge to sufficient interest must be disposed of before considering the claim on its merits.21 The consequences of a dismissal at the preliminary stage are serious and care must be taken.22 An exception to dismiss will only succeed where the plaintiff "clearly has no interest".23 Nonetheless, the existence of that interest must be capable of being established before going further.24

The Court also noted that the facts alleged in the Motion to Institute Proceedings need not be assumed to be true when the lack of sufficient interest is argued as a ground for dismissal. Evidence may be introduced on that issue.25

In Brunette, the question of whether there was sufficient interest was analyzed from the perspective of corporate law and the distinction between the rights of the corporation itself and those of its shareholders.

Shareholders' right of action versus the corporation's right of action

At the outset, the majority of the Supreme Court stressed the principle of the corporation's distinct legal personality.

That principle, which was stated in the well-known English case Foss v. Harbottle,26 applies fully in Quebec civil law and the Supreme Court explained this by pointing out that a shareholder who chooses the vehicle of a corporation may not have their cake and eat it too. The Court stated:

[27] The benefits of incorporation come with a corresponding limit on the rights of shareholders: Houle, at p. 178. It would be incoherent — and indeed, unjust — for shareholders to benefit from limited liability while at the same time gaining a right of action in relation to faults committed against the corporation in which they hold shares: Martel, at para. 1-28; see also Silverman v. Heaps, at p. 539. The corporate veil is impermeable on both sides; just as shareholders cannot be liable for faults committed by the corporation, so too are they barred from seeking damages for faults committed against it: Houle, at pp. 177-80; see also F. Pérodeau, "Le sort réservé à la réclamation d'un actionnaire pour la perte de valeur de ses actions : une revue de la jurisprudence québécoise" in Barreau du Québec, vol. 255, Les dommages en matière civile et commerciale (2006), at pp. 5-6.27

In Houle v. Canadian National Bank,28 (Houle), the Supreme Court of Canada held that shareholders may possess their "own right of action against the same defendant" where "(1) ... the defendant breached a distinct obligation owed to the shareholders, and (2) ... this breach resulted in a direct injury suffered by the shareholders, independent from that suffered by the corporation".29

In Brunette, the Court made a point of saying that the principles stated in Houle do not create an exception to the general rule barring a shareholder from obtaining compensation for faults committed against the corporation.30 The decision in Houle is simply an application of the general principles of civil liability in Quebec law.31 If a fault was genuinely committed against the shareholders themselves and they have suffered their own injury, a cause of action may lie, in particular under article 1457 or 1458 of the Civil Code of Québec. However, the corporation's cause of action is not its shareholders' cause of action.

The Court then applied these principles to the case at hand. On the issue of fault, the appellants argued that the respondent professionals had maintained contractual relationships with both the corporations of Groupe Melior and Fiducie.32 In their submission, the respondents had committed faults against Fiducie as well.

That argument did not persuade the Court, which rejected it, noting that the allegations in the Motion to Institute Proceedings "do not disclose the breach of an independent legal obligation owed to Fiducie".33 In the Court's opinion, it is clear from the allegations in the Motion to Institute Proceedings that there was confusion between the rights of the Groupe Melior corporations and the rights of Fiducie and between the obligations owed to each of them.34

On the issue of injury, the Supreme Court was of the opinion that the injury was suffered by the Groupe Melior corporations and not by Fiducie. The $55 million claimed corresponded to the net value of the seniors' residences owned by Groupe Melior before its bankruptcy.35 However, these were assets of the Groupe Melior corporation and not of Fiducie. The appellants argued that the injury to Fiducie was "the total loss of value of the trust patrimony".36 Following the reasoning described above, the majority of the Supreme Court was of the opinion that this was an indirect injury for which compensation was not available under article 1607 of the Civil Code of Québec.37

The Court therefore concluded that Fiducie did not have a sufficient interest to have standing and that the judgment at trial and the decision of the Court of Appeal were correct. It added that there are remedies available if the corporation suffers an injury such as the one suffered by the Groupe Melior corporations. The Court cited the derivative action in legislation concerning corporations or the right of a creditor to bring an action based on a corporation's right of action under the Bankruptcy and Insolvency Act.38 However, that does not give a shareholder a direct right of action.

Dissenting Opinion Of Justice Côté

Justice Côté set the tone in the first sentence of her dissent, noting that "there is nothing trivial about dismissing an action before the plaintiff has even had an opportunity to be heard on the merits".39 In fact, Justice Côté devoted a large part of her reasons to the importance of exercising caution at the dismissal stage. She stressed the meaning to be given to the "clear" ["manifeste"] lack of sufficient interest. For the lack of interest to be "clear", it must be "plainly seen" or be "very apparent, discernible simply from seeing or reading a document, record or judgment".40

In the opinion of Justice Côté, the lower courts and the majority of the Court of Appeal were wrong to find that the appellants "clearly" did not have a sufficient interest. When she applied corporate law to the issue in this case, Justice Côté stated that she agreed with the majority on a number of issues but disagreed on a crucial point. In her opinion, while the Court had to find that a breach of a distinct obligation to the shareholder was alleged, the Court should not look for "distinct" damage to the shareholder that is unrelated to that of the corporation. Under Quebec civil law, the Court must simply ask whether the circumstances show that a direct personal damage was suffered by the shareholders.41 Justice Côté wrote:

[79] However, I respectfully believe that my colleague departs from those very principles by emphasizing the "distinct" nature of the damage and by reading Houle too narrowly (paras. 29 31, 33 and 41). His reasons, like those of the courts below, suggest that the shareholder's damage must be unrelated to that of the corporation. But that is not the case. In Houle, the plaintiffs' damage — a drop in the value of their shares — resulted from the liquidation of the corporation's assets. It was not entirely "distinct" damage. What is more, L'Heureux Dubé J. at no time used the word "distinct" to describe the damage in question, as she did to describe the obligation owed to the shareholder.

[80] In my opinion, Houle requires no more than does the Civil Code of Québec, namely that the damage be direct and personal (arts. 1607 and 1611 C.C.Q.): ... 42

Justice Côté added that in Houle, the shareholders' damage resulted from the loss of value of their shares, as was the case for Fiducie. In Houle, special circumstances that gave the shareholders a right of action were identified.43

After making that point, Justice Côté found that the issue of whether the damage was direct or not should have been left for the trial judge to determine, since it calls for an analysis of all of the circumstances of the case.44 Justice Côté was of the opinion that Fiducie had made sufficient allegations to support an argument that a breach of a distinct obligation owed to Fiducie caused it damage that was direct and personal.45

Justice Côté noted that the professionals were subject to contracts of mandate with Fiducie that gave rise to general duties to inform and advise it. On that point, she wrote:

[98] Unlike my colleague (paras. 35 40), I am of the view that it would be possible for the trial judge to find on the basis of the alleged facts — after considering the evidence — that the respondents breached obligations that were distinct from the ones they owed to the Groupe Melior corporations. It is true that the MIP contains few specific allegations concerning the mandates given by Fiducie and their connection with the alleged breaches. However, the respondents' duties to provide information and advice were not strictly circumscribed by the object of those mandates (see Côté v. Rancourt, 2004 SCC 58 (CanLII), [2004] 3 S.C.R. 248, at para. 6). For example, the circumstances could in themselves have required the respondents to inform Fiducie directly and in a timely manner. It was clearly in Fiducie's interest to be aware of the situation, since it might have been in the best position to ensure that the necessary action was taken by the various entities of Groupe Melior and by their partners (see, inter alia, MIP, at paras. 181, 229 and 256). In my opinion, these are questions of mixed fact and law that cannot be decided at this stage of the proceedings without considering the relevant evidence.46

On the question of damage, Justice Côté added that the facts alleged could allow the trial judge to conclude that the respondents' breaches were the direct cause of the appellants' damage, that is, the destruction of the trust patrimony, in light, among other things, of the respondents' alleged failure to inform Fiducie in a timely manner, in breach of their obligations under the contracts of mandate with Fiducie. With respect to the use, by the appellants, of the value of the properties to estimate the value of their shares before the collapse of Groupe Melior, Justice Côté was of the opinion that this issue related solely to the quantum of damages, and not to the very existence of the damage.47

In the opinion of Justice Côté, to the extent that there was ambiguity in the allegations with regard to the amount of the damages being claimed, the solution lay in an amendment of the MIP and in the expert evidence that would be presented at trial, not in the death sentence represented by dismissal of the action at the preliminary stage.48

For these reasons, Justice Côté would therefore have allowed the appeal.

Comments And Conclusion

This decision provides important reminders and instructions regarding both Quebec civil procedure and corporate law.

First, on the issue of motions to dismiss and inadmissibility, caution must not be synonymous with an attitude of wait-and-see, to borrow an expression used by Chief Justice Wagner when he sat on the Court of Appeal of Quebec.49 When the evidence used to make out a cause of action or a sufficient interest is not disclosed by the allegations in the pleading, the Court must intervene at the inadmissibility stage, in the interests of justice.

In addition, being a shareholder of a corporation does not mean having the corporation's right of action. The rule that a corporation has distinct personality dates back several centuries and there is nothing novel about it. Nonetheless, there are some situations in which the existence of a shareholder's direct right of action, as opposed to the corporation's right of action, is still debated. Consider, for example, the hesitation of a minority shareholder between initiating a direct action in oppression versus a derivative action brought on behalf of the corporation, with authorization from the Court. Is the shareholder really a direct victim of the conduct at issue (for example, that of the directors), or is it only the corporation that suffers an injury?

Justice Côté's dissent accounts for this type of incertitude in some cases. She believes that,where there is a breach of a distinct duty owed to shareholders, courts should not focus on whether the damage suffered by the shareholders is completely distinct or independent from the damage suffered by the corporation. According to Justice Côté, doing so would mean ignoring the real question in Quebec civil law, i.e., whether there are exceptional circumstances that make the shareholders' damage, such as the loss of value of their shares, direct damage, as required by article 1607 C.C.Q.50.

In any event, these are fundamental questions that are central to Canadian corporate law. While choosing the vehicle of a corporation has many advantages, the distinct personality of the corporation also has certain consequences that must not be forgotten.

Footnotes

[1] 2018 SCC 55 (Decision).

[2] Article 165(3) of the former Code of Civil Procedure which corresponds to article 168(3) of the present Code of Civil Procedure.

[3] Decision of the SCC, para. 2.

[4] Id., para 3.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Ibid., para. 5.

[10] 2015 QCCS 3482.

[11] Decision, para. 6.

[12] Id.

[13] Ibid., para. 7.

[14] 2017 QCCA 391.

[15] Decision, paras. 8 and 9.

[16] Id., para. 13.

[17] Bou Malhab v. Diffusion Métromédia CMR inc., [2011] 1 S.C.R. 214.

[18] Decision, para. 14.

[19] Id., para. 16.

[20] Ibid., para. 17.

[21] Ibid., para. 19.

[22] Ibid. para. 18.

[23] Ibid. par 18.

[24] Ibid, para. 19.

[25] Ibid., para. 20.

[26] Foss v. Harbottle, (1843), 2 Hare 461, 67 E.R. 189.

[27] Decision, para. 27.

[28] Houle v. Canadian National Bank, [1990] 3 S.C.R. 122

[29] Decision, para. 29.

[30] Id., para. 30.

[31] Ibid.

[32] Ibid., para. 34.

[33] Ibid., para. 35.

[34] Ibid, para. 37.

[35] Ibid., para. 41.

[36] Ibid.

[37] Ibid., para. 44.

[38] Ibid., para. 53.

[39] Ibid., para. 55.

[40] Ibid., para. 63.

[41] Ibid., para. 78

[42] Ibid., para. 79-80.

[43] Ibid., para. 79.

[44] Ibid., paras. 85-93

[45] Ibid., para. 94.

[46] Ibid., para. 98.

[47] Ibid., para. 100.

[48] Ibid., para. 100.

[49] Beaulieu v. Laflamme, 2011 QCCA 1909, para. 9.

[50] Art. 1607 codifies the creditor's right to damages to remedy the injury, whether moral or material, that is caused to the creditor by the debtor's default and is an immediate and direct consequence of it.

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
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
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