SCC confirms that corporate directors can be liable personally for oppression.
Thursday, July 13, 2017 - Filed in: Court Cases
"From 2005 to 2007, A was the President, the Chief Executive Officer, a significant minority shareholder and a director of Wi2Wi Corporation (“Wi2Wi”). In March 2007, in negotiating the merger of Wi2Wi with another corporation, A also agreed to sell it some of his common shares and signed a share purchase agreement to that effect without notifying Wi2Wi’s Board. When the Board found out about the existence of the agreement, A was censured for concealing the deal and failing to disclose the potential conflict of interest. Consequently, A resigned from his functions. W, a member of Wi2Wi’s Board and audit committee, became its President and CEO. Neither the merger nor the share purchase occurred.
In September 2007, in response to Wi2Wi’s continuing financial difficulties, the Board decided to issue a private placement of convertible secured notes (“Private Placement”) to its existing common shareholders. Prior to the Private Placement, the Board accelerated the conversion of Class C Convertible Preferred Shares, beneficially held by an investment company for W, into common shares. It did so despite doubts as to whether or not the financial test for C Share conversion had been met. However, A’s Class A and B Convertible Preferred Shares were never converted into common shares, notwithstanding that they met the relevant conversion tests. In Board meetings, W and another director, B, advocated against converting A’s A and B Shares on the basis of A’s conduct and involvement in the parallel share purchase negotiation when he was President. Consequently, A did not participate in the Private Placement and the value of his A and B Shares and the proportion of his common shares in Wi2Wi were substantially reduced. A then filed an application under s. 241 of the Canada Business Corporations Act for oppression against four of Wi2Wi’s directors, including W.
The trial judge granted the application in part. He held W and B solidarily liable for the oppression and ordered them to pay A compensation. The Court of Appeal dismissed W and B’s appeal. It held that the imposition of personal liability was justified and that the pleadings did not preclude it. W now appeals to the Court, challenging the trial judge’s conclusion that it was fit to hold him personally liable for the oppressive conduct."
The S.C.C. (9 : 0) dismissed the appeal.
Justice Côté wrote as follows (at paras.1-3, 47-57):
"Section 241(3) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (“CBCA ”), allows a court to “make any interim or final order it thinks fit” to rectify the matters complained of in an action for corporate oppression. The principal question raised by this appeal is when an order for compensation under this section may properly lie against the directors of a corporation personally, as opposed to the corporation itself.
For almost 20 years, the leading authority on this question has been the Ontario Court of Appeal’s decision in Budd v. Gentra Inc. (1998), 43 B.L.R. (2d) 27 (“Budd”), and in my view, there is no reason to depart from the guidance provided in Budd now.
In this case, the trial judge did not err in his application of Budd or the principles governing orders under s. 241(3) when he found the appellant director personally liable for the oppressive conduct. Appellate intervention is therefore unwarranted, and I would accordingly dismiss the appeal.
…Budd provides for a two-pronged approach to personal liability. The first prong requires that the oppressive conduct be properly attributable to the director because he or she is implicated in the oppression (see Budd, at para. 47). In other words, the director must have exercised — or failed to have exercised — his or her powers so as to effect the oppressive conduct (Sidaplex, at p. 567; see also Budd, at paras. 41-44, citing Gottlieb v. Adam (1994), 21 O.R. (3d) 248 (Gen. Div.), at pp. 260-61).
But this first requirement alone is an inadequate basis for holding a director personally liable. The second prong therefore requires that the imposition of personal liability be fit in all the circumstances. Fitness is necessarily an amorphous concept. But the case law has distilled at least four general principles that should guide courts in fashioning a fit order under s. 241(3). The question of director liability cannot be considered in isolation from these general principles.
First, “the oppression remedy request must in itself be a fair way of dealing with the situation” (Ballard, at para. 142). The five situations identified by Koehnen relating to director liability are best understood as providing indicia of fairness. Where directors have derived a personal benefit, in the form of either an immediate financial advantage or increased control of the corporation, a personal order will tend to be a fair one. Similarly, where directors have breached a personal duty they owe as directors or misused a corporate power, it may be fair to impose personal liability. Where a remedy against the corporation would unduly prejudice other security holders, this too may militate in favour of personal liability (see Koehnen, at p. 201).
To be clear, this is not a closed list of factors or a set of criteria to be slavishly applied. And as explained above, neither a personal benefit nor bad faith is a necessary condition in the personal liability equation. The appropriateness of an order under s. 241(3) turns on equitable considerations, and in the context of an oppression claim, “It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise” (Ebrahimi v. Westbourne Galleries Ltd.,  A.C. 360, at p. 379 (“Ebrahimi”)). But personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct. With respect to these two elements, four potential scenarios can arise:
i) The director acted in bad faith and obtained a personal benefit;
ii) The director acted in bad faith but did not obtain a personal benefit;
iii) The director acted in good faith and obtained a personal benefit; and
iv) The director acted in good faith and did not obtain a personal benefit.
In general, the first and fourth scenarios will tend to be clear-cut. If the director has acted in bad faith and obtained a personal benefit, it is likely fit to hold the director personally liable for the oppression. On the other hand, where neither element is present, personal liability will generally be less fitting. The less obvious cases will tend to lie in the middle. In all cases, the trial judge must determine whether it is fair to hold the director personally liable, having regard to all the circumstances. Bad faith and personal benefit are but two factors that relate to certain circumstances within a larger factual matrix. They do not operate to the exclusion of other considerations. And they should not overwhelm the analysis.
Further, even where it is appropriate to impose personal liability, this does not necessarily lead to a binary choice between the directors and the corporation. Fairness requires that, where “relief is justified to correct an oppressive type of situation, the surgery should be done with a scalpel, and not a battle axe” (Ballard, at para. 140). Where there is a personal benefit but no finding of bad faith, fairness may require an order to be fashioned by considering the amount of the personal benefit. In some cases, fairness may entail allocating responsibility partially to the corporation and partially to directors personally. For example, in Wood Estate, a shareholder made a short-term loan to the corporation with the reasonable expectation that it would be repaid from the proceeds of a specific transaction. Those proceeds were instead applied to corporate purposes, as well as to repayment of the loans made to the corporation by the defendant directors and officer and by another shareholder. D.M. Brown J. held the defendant directors and officer liable for the amounts used to repay their own loans and the shareholder loan, and also ordered the corporation to pay an equal amount towards the balance of the loan. As this last example shows, the fairness principle is ultimately unamenable to formulaic exposition and must be assessed on a case-by-case basis having regard to all of the circumstances.
Second, as explained above, any order made under s. 241(3) should go no further than necessary to rectify the oppression (Naneff, at para. 32; Ballard, at para. 140; Themadel Foundation v. Third Canadian General Investment Trust Ltd. (1998), 38 O.R. (3d) 749 (C.A.), at p. 754 (“Themadel”)). This follows from s. 241 ’s remedial purpose insofar as it aims to correct the injustice between the parties.
Third, any order made under s. 241(3) may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders (Naneff, at para. 27; Smith v. Ritchie, 2009 ABCA 373, at para. 20 (CanLII)). The oppression remedy recognizes that, behind a corporation, there are individuals with “rights, expectations and obligations inter se which are not necessarily submerged in the company structure” (Ebrahimi, at p. 379; see also BCE, at para. 60). But it protects only those expectations derived from an individual’s status as a security holder, creditor, director or officer. Accordingly, remedial orders under s. 241(3) may respond only to those expectations. They may not vindicate expectations arising merely by virtue of a familial or other personal relationship. And they may not serve a purely tactical purpose. In particular, a complainant should not be permitted to jump the creditors’ queue by seeking relief against a director personally. The scent of tactics may therefore be considered in determining whether or not it is appropriate to impose personal liability on a director under s. 241(3). Overall, the third principle requires that an order under s. 241(3) remain rooted in, informed by, and responsive to the reasonable expectations of the corporate stakeholder.
Fourth — and finally — a court should consider the general corporate law context in exercising its remedial discretion under s. 241(3). As Farley J. put it, statutory oppression “can be a help; it can’t be the total law with everything else ignored or completely secondary” (Ballard, at para. 124). This means that director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances (see, e.g., Stern v. Imasco Ltd.(1999), 1 B.L.R. (3d) 198 (Ont. S.C.J.)).
Under s. 241(3), fashioning a fit remedy is a fact-dependent exercise. When it comes to the oppression remedy, Carthy J.A. put the matter succinctly:
The point at which relief is justified and the extent of relief are both so dependent upon the facts of the particular case that little guidance can be obtained from comparing one case to another and I would be hesitant to enunciate any more specific principles of approach than have been set out above.
(Themadel, at p. 754)
The four principles articulated above therefore serve as guideposts informing the flexible and discretionary approach the courts have adopted to orders under s. 241(3) of the CBCA "
Note: The summary and body are drawn from Eugene Meehan’s SupremeAdvocacy Weekly Updates for the Law Community.