Shon v. Argo Mezzanine Financing No.3 Ltd., 2014 BCSC 2117

This decision confirms that, contrary to the rule in certain U.S. jurisdictions, shareholders will only rarely be able to make a fiduciary breach claim directly against an officer or director of a corporation. To do so, they must establish  not only an independent relationship with the defendant but also a loss that was separate from any loss suffered by the corporation (and hence all other shareholders). Shareholders may, however, be able to bring oppression actions against specific directors for unfairly prejudicing their interests. (The plaintiff did not appear to do so in this case, for reasons that are not immediately apparent.)

The plaintiff, Ms. Shon, invested $0.5 million in a real estate project in Vancouver. Mr. Hong solicited investment in respect of this project, and was president of Argo Mezzanine Financing No. 3 Ltd. (“Argo No. 3”), a privately held company, and the entity holding the interest in the underlying lands on which the project would be located.

According to Ms. Shon, Mr. Hong caused a mortgage of the underlying lands to be granted to a related entity and then falsely represented to the Argo No. 3 investors that the project would fail if they did not return their shares and provide further investment funds to Mr. Hong. Ms. Shon brought a claim against Mr. Hong alleging, among other things, negligent misrepresentation. Directors generally owe a duty of care to the corporation, not directly to individual shareholders (who may instead bring an oppression action against a director that disregards their interests).

The Court affirmed that, in certain circumstances and particularly in closely-held corporations, directors may   owe fiduciary duties directly to shareholders. In order for a shareholder to make out such a claim, he or she must establish that the director had a relationship with the shareholder that was independent of the director’s duties to the corporation; the loss suffered must similarly be independent of any losses suffered by the corporation.

The Court found that the losses claimed were suffered by all shareholders of Argo No. 3, and not simply Ms. Shon. As a result, Ms. Shon could not claim any losses that were independent of the losses of Argo No. 3.

A full text of the decision can be found here.