October 22, 2021
The oppression remedy is NOT the solution to all corporate deadlock involving closely held private corporations. It is only available for conduct which is unfairly prejudicial to or unfairly disregards the interests of the other shareholder. It is not a good option to resolve mutual falling out situations. You should consider other remedies in those cases.
To review what we explained in prior articles, an oppression remedy under either the Canada Business Corporations Act or the Ontario Business Corporations is an equitable remedy intended to achieve fairness between stakeholders by ordering a “just and equitable” result. Equity may vary from parties’ strict legal rights. Courts considering the remedy look at business realities, not just technical realities. Each case depends upon its own facts, particularly looking at the reasonable expectations of the parties and their relationship. However, there are certain common factors that a court looks at in measuring reasonable expectations:
- general commercial practice;
- the nature of the corporation;
- the relationship between the parties;
- past practice;
- steps the claimant might have taken to protect themselves;
- representations and agreements; and
- the goal of resolving conflict.
Because it is an equitable remedy, claimants must usually “come to court with clean hands”. In situations of a mutual falling out, this may be a difficult test to meet.
Leis v. Lee is a case in point. Two shareholders had set up a corporation to provide information technology services to clients. Lee was sole officer and director, owning 51 shares. Leis owned 49 shares. A unanimous shareholders agreement provided for division of compensation, contribution of capital, nomination of directors, and a buy-sell provision. One provision apparently permitted Leis at any time to require Lee to transfer to Leis one share, to result in equal shareholding.
Over time, the shareholders disagreed about the payments to each other out of the corporation. This led to a showdown over Leis’ management of the corporation’s finances. Lee unilaterally cut off Leis’ access to corporate funds. Leis retaliated by attempting to trigger his right to buy the one share, and to become a director. Lee in turn attempted to trigger the “buy-sell” clause. The sale was never completed, primarily because Leis claimed that he was owed $30,000.
The relationship deteriorated further from there, imperilling the viability of the business.
Lee allegedly then performed services for the corporation’s clients through another corporate vehicle. Leis of course viewed this as oppression. Lee claimed that, to the contrary, Leis’ conduct was oppressive toward Lee.
The corporation was eventually dissolved, but the shareholders sought remedies against each other for their alleged losses.
The judge viewed each shareholder’s actions as having contributed to the failure of the corporation. Neither was solely responsible for the situation. Because neither was more at fault than the other for this mutual falling out, the oppression remedy was not available.
The obvious lesson to be learned here is that poor behaviour will not lead to good outcomes. Less obvious is the fact that two wrongs never create a right.
If you are a shareholder in a private corporation, you need to consider conflict resolution mechanisms short of going to court. This might be as simple as seeking advice from your lawyer early in the situation, or utilizing a more formal dispute resolution mechanism such as mediation or arbitration, to attempt to maintain the viability of the business going forward, and avoid everybody involved suffering losses.