Closely-held companies are especially dependent on productive and harmonious relationships among their shareholders. When those relationships break down, it can be very difficult to resolve the resulting conflicts. In some instances, disagreements arise among the shareholders. In others they arise between the company and the shareholders. Since many Certified General Accountants advise closely-held companies—and often serve as their sole advisers in these disputes—it is imperative that they have a thorough understanding of the legal options for resolving them. These options include a shareholders’ agreement, shareholder dissent rights, a derivative action and dissolution of the company. The most effective, however, is the “oppression” remedy.

Definitions

If the affairs of a company incorporated under the B.C. Business Corporations Act are being (or have been) conducted, or its directors’ powers exercised, in an “oppressive” manner, or if a corporate act has been done (or is threatened) or a shareholder resolution has been passed (or proposed) that is “unfairly prejudicial” to a shareholder, they can apply under s. 227 of the Act to the Supreme Court of B.C. for a remedy. Shareholders of companies incorporated under statutes of other Canadian jurisdictions, which can carry on business in B.C., have broadly similar (but not identical) rights.

A “shareholder” includes registered and beneficial shareholders and any other person who, in the court’s view, is an “appropriate person” to apply. Minority and majority shareholders can apply.

An “appropriate person” is one with an interest similar to a shareholder, such as the parent of a corporate shareholder or a beneficiary of a trust shareholder. A creditor can also be an “appropriate person”. Under the federal, Ontario and Alberta corporate statutes directors and former directors can also apply.

This oppression remedy adds additional obligations on top of a company’s strict legal duties. Those obligations are concerned with fairness in the context of business realities, not narrow legalities. The touchstone of oppression is the shareholder’s objectively reasonable expectations about how the company will be run.

Whether conduct is oppressive depends on two things:

  • Did it violate the shareholder’s reasonable expectations?
  • Was it “oppressive”, “unfairly prejudicial” or (for federal, Ontario and Alberta companies) did it “unfairly disregard” the shareholder’s interests?

Determining “reasonable expectations”

A shareholder’s expectations must be both subjectively held and objectively reasonable in the circumstances. A shareholder’s fundamental reasonable expectation is that they will be treated fairly. Shareholders’ expectations can change over time, as the circumstances change.

In determining whether a shareholder’s expectations are reasonable the courts consider:

  • Whether the shareholder’s complaint concerns their status as a shareholder, not as director, officer or employee.
  • Whether the company is closely-held or public (closelyheld companies are given more latitude in how strictly they must comply with legal requirements).
  • The shareholder’s relationships with other corporate actors.
  • The company’s past practice.
  • Normal business practices.
  • Whether the shareholder could have protected themselves, for example through negotiation.
  • Whether there is a shareholders’ agreement and, if so, what it provides.
  • The company’s representations to its shareholders or, for a public company, the public.
  • The fair resolution of conflicting stakeholder interests.

What qualifies as “oppressive”?

To be “oppressive”, conduct must be “burdensome, harsh and wrongful”, or lacking in probity or fair dealing. The court looks for conduct that is coercive or an abuse of power, or suggests bad faith or a departure from standards of fair dealing.

Whether the shareholder must be able to prove bad faith by those running the company is unclear. The more recent view is not, at least where the conduct complained of was not legally authorized. What is important is the effect of the conduct, not its motive.

Oppression is fact specific. What is oppressive in one case may not be in another. Examples include:

  • Not recognizing a shareholder’s status.
  • Breaching obligations in the company’s statute or articles.
  • Not providing required or customary financial information.
  • Not holding required shareholders’ meetings.
  • Improperly appointing or removing directors.
  • Excluding from management a shareholder with a reasonable expectation of continued involvement.
  • Improper business dealings, such as paying unwarranted management fees or making improvident loans to shareholders.

What qualifies as “unfairly prejudicial”?

To be “unfairly prejudicial”, conduct must be just what the phrase suggests: conduct that prejudices a shareholder unfairly. Conduct may be prejudicial, but not unfair. Conduct that is not oppressive may still be unfairly prejudicial. Examples include:

  • “Squeezing out” a minority shareholder.
  • Not disclosing related party transactions.
  • Adopting a “poison pill”.
  • Paying dividends without formal declaration.
  • Paying management fees only to some shareholders.
  • Paying abnormal directors’ fees.

What qualifies as “unfairly disregarding” a shareholder’s interest?

Under the federal, Ontario and Alberta statutes, shareholders can also apply for a remedy where conduct “unfairly disregards” their interests. This means treating their interests as unimportant. Conduct that is not unfairly prejudicial may still unfairly disregard a shareholder’s interests. Examples include:

  • Not prosecuting claims against a director.
  • Improperly reducing a shareholder’s dividends.
  • Failing to return a shareholder’s property.

Generally, where a shareholders’ agreement contains remedies similar to those available from the court, shareholders should pursue their rights under the agreement. However, breaches of a shareholders’ agreement can themselves be oppressive.

Remedies available

If the court is satisfied there has been oppression, it “may make any interim or final order it considers appropriate”. This very broad discretion is what makes the oppression remedy so powerful. However, it is tempered by the requirements that the court act “with a view to remedying or bringing to an end the matters complained of ” and respect the shareholders’ reasonable expectations. The most common remedies are orders:

  • specifically remedying the conduct complained of;
  • requiring the company or other shareholders to purchase the shareholder’s shares;
  • appointing a receiver or receiver-manager; and
  • dissolving the company.

A shareholder may apply for a remedy from a company’s directors or officers personally. That requires that they have personally oppressed the shareholder and that the circumstances require that to be remedied by their personally compensating the shareholder. That may be so where they have personally benefitted from their conduct or furthered their corporate control through it.

The oppression remedy can be a powerful tool for resolving shareholder disputes. Because whether a shareholder has been oppressed is so fact specific, and the court has so much discretion in determining the appropriate remedy, CGAs are well-advised to seek legal counsel to plan an effective dispute resolution strategy.

This article appeared in the June issue of Outlook magazine, a publication of the Certified General Accountants Association of BC.