The normal reaction of a shareholder who doubts the propriety of actions taken by the company's officers, or who feels that their rights as a security holder have been unfairly prejudiced, is to ask the courts to order an investigation into the company's dealings.
Under sections 229 and 241(3)(m) of the Canada Business Corporations Act ("CBCA"), the court can order an investigation under certain circumstances related, in particular, to fraudulent or dishonest acts, or the abuse of security holders. The purpose of such an investigation is basically to disclose facts that would not otherwise be accessible to security holders and therefore to allow a specialized inspector, under the court's authority, to collect the relevant facts without it being necessarily transformed into a fishing expedition. Once the facts have been disclosed, the shareholders can institute the appropriate remedies, or not. Thus, the investigation is not meant to determine the rights of the parties, but to bring facts that are unknown, and possibly camouflaged by the company to light.
However, it is not easy to obtain such an order: it is an exceptional measure that must satisfy very specific conditions.
On June 2, 2014, in Trackcom Systems International Inc. c. Trackcom Systems Inc., the Court of Appeal of Québec carefully set out the conditions for applying this measure and concluded, as the Fasken litigation team had argued, that the Superior Court of Québec had erred in law by ordering a full-blown investigation into the dealings of Trackcom Systems. Trackcom has since been regularly cited by lawyers before the Commercial Division of the Superior Court of Québec and, this Court has specifically referred to the case on at least four occasions when disposing of this issue. Moreover, Trackcom also has the distinction of having been rendered by the Honourable Justice Clément Gascon, now a Supreme Court of Canada justice, who relied not only on Quebec jurisprudence but on that of the common law provinces as well. In this sense, this decision is clearly national in scope.
The Court of Appeal of Québec reiterated that, in order to obtain the issuance of an order under section 241 of the CBCA, such as the holding of an investigation into the company, the applicant must prove, as with a provisional interlocutory injunction, the following:
- a prima facie right to make this request, therefore the applicant must establish the apparent presence of oppressive acts;
- the irreparable prejudice that will be suffered if the order is not obtained;
- the fact that the applicant will suffer more inconvenience than society if the order is not obtained.
However, the applicant's burden doesn't end here. The measure remains discretionary (section 241 of the CBCA states that "the court may"). The applicant must therefore also convince the court that an investigation into the company is warranted in the circumstances.
The Court of Appeal of Québec applied a three-prong test to determine whether an investigation into the dealings of Trackcom Systems Inc. was appropriate:
- the applicant is a security holder;
- the applicant established prima facie fraud or dishonesty or an intention to so act and cause prejudice to the applicant. All that is needed is prima facie evidence of any impropriety. More cannot be required because, in principle, the goal of the investigation is to bear light on unknown facts. The applicant must simply establish that it has good reason to believe that there is something fishy going on. Mere suspicion, however, is insufficient.
- the appropriateness of the remedy: i.e. the investigation is appropriate bearing in mind its usefulness and reasonableness, in particular from the standpoint of the cost/benefits ratio of such an investigation.
When assessing its appropriateness (which the Superior Court failed to do in Trackcom), the court must ensure i) that such an investigation is useful and ii) its cost. The applicant must therefore precisely specify both the objectives the investigation seeks to accomplish and the underlying facts justifying them. It must also obtain from the inspector a precise evaluation of the costs involved. Ultimately, the cost/benefits ratio must be conclusive.
Another factor that will invariably be considered when the court considers appropriateness is whether there are other less costly means by which the same goals can be accomplished. In some cases, this means examinations for discovery or having documents produced during ongoing oppression litigation or, as in Trackcom, the issuance of a less grandiose order such as an order to audit the company's financial statements.
That said, even in cases where an investigation is ordered, the court cannot write the inspector a blank cheque; an investigation into a company is a highly drastic remedy that should only be authorized with caution: in each case, the investigative mandate will therefore be limited to the objectives sought and accompanied by a tight budget.
The courts will doubtlessly be even more circumspect when exercising their discretion since the arrival of the new Code of Civil Procedure of Québec, in force as of January 1, 2016, that advocates and promotes the principles of controlling the costs of litigation, fairness, and proportionality.