Shareholder Remedies

Shareholder Remedies • • Ownership of a share means that shareholder has a “bundle of rights” attached to that share o Remedies are the means by which shareholders can enforce some of those rights shareholders can assert some rights without starting an action in court: o Voting, Proposing an item for the AGM agenda, Requisitioning a meeting, Removing directors Derivative Action • What happens when a wrong is done to the corp but the directors don’t do anything about it? • It seems like, based on the common law, a shareholder would not have standing to bring an action to remedy the wrong, and/or receive the benefit if the action is successful Foss v Harbottle [1843] F: directors sold property to the company at an inflated price, but was approved by majority of shareholders (selfdealing); a few minority shareholders attempted to bring an action on behalf of the company A: corporation is a separate legal entity, so it is the proper plaintiff in these scenarios if a wrong has been done to it • Majority rule will speak for the company – these issues are not for the courts, but for meetings • If the majority ratified this wrong, that majority speaks for the company, so individual shareholder has no standing to bring an action on behalf of the company o No common law derivative action Statute says the opposite: • A shareholder may bring an action on behalf of the corporation o The cause of action derives from the corporation’s cause of action (ie. derivative action) o The action is rectify a wrong committed against the corp in situations where the mgmt is not trying to o Often, 1+ of the management was the alleged wrongdoer (so obviously they won’t bring action) • Statute is giving the shareholder standing if certain criteria are met (to prosecute, or defend on behalf) • Two step process: complainant must apply for leave first, then commence legal proceeding on behalf of corp o 232(1) – Rights are granted to a shareholder (broad definition) or a director o 233(1) – criteria for leave to commence the action o 233(4) – court may make any order it deems appropriate (a lot of flexibility here) o 233(5) – legal proceeding (step 2) cannot be settled outside of court without approval o 233(6) – ratification of shareholders does not immediately dismiss action, but can be used as evidence • Pro: Enhance management’s accountability • Con: Potential for frivolous or nuisance suits (this is a reason why complainants must apply for leave first) Note: there is significant overlap with Director’s breach of DoC or FD with DAs, PAs and oppression remedy Re Northwest Forest Products [1975] F: Northwest owned 51% of pulp company Forest Valley; FV then sold assets to another company at apparent undervaluation; shareholders asked directors of NW to vote to set sale aside; sought leave for derivative action I: do they meet criteria under statute for step 1? A: most criteria are satisfied – but is it in the interest of the corporation that the action be brought? • Do not have to prove their case – just show prima facie in the interest of the company (low threshold step 1) o minority shareholders are usually on the outside with limited information available at this step o not held to the same standard as the Crown would be in a criminal prima facie case • Court has discretion to allow minority shareholders to commence action on behalf of the company • May be concerning matters to individual shareholders of FV, but that does not detract from or preclude this DA • Sale was so 90K below the market value; failed to seek out other bids – so was prima facie in the interest o Director was negligent, not reasonable, corporation suffered a loss (and director Clarke appears to gain) o Granted leave – move to second stage of action (we don’t look at that) Re Bellman and Western Approaches [1981] F: Split amongst directors (5-3): Bellman group appointed 3, Duke appointed 5 – Duke then got loan which allowed them to purchase shares to control all directors; but loan required Duke to disclose confidential information to the bank, and a requirement that Duke use their powers to cause Western to go public; Complainants seek leave for DA A: directors claim they were not given notice because one of the grounds in the petition was not in the notice letter • Notice does not have to specify each and every cause of action – just requires ‘reasonable notice’ of intention to apply to commence a derivative action • Court does not have to satisfy that it is in the interest of the corporation – only have to show that it appears to be in the best interests of the company o Presumably it was the intention of the drafters to remove the common law barriers to this action (Foss) § Ratification procedure by majority is also clearly eliminated o Quantifiable loss was not proven, but there was still evidence of potential loss o Loan agreement would require borrowers to pay a fee based on gross revenue if they did not go public, which might place directors in conflict of interest – keep revenues down to reduce fee, or maximize revenue in the interest of all shareholders Baron: two-step process has lower threshold, but allows courts to shut down actions quickly to not bog down court, Turner v Mailhot [1985] F: P and wife had 30% of shares; the rest held by D and his wife; after disagreement, P and wife were fired, locked out of building; P sought and obtained leave to bring DA, seeking return of lost income diverted to the defendant A: Wallersteiner – person bringing DA had exhausted all of their money, but still sought to bring action; would derive very little personal benefit from victory in litigation, and was therefore indemnified • Here, Turner, as a 30% shareholder, would stand for great personal benefit out of litigation, not so much for company (not a ‘lone altruist’) – he also has not exhausted his financial means at all o Financial ability is an important consideration, but it is not mandatory, as that would be contrary to the idea that the plaintiff is the agent of the company for the purposes of the action o The benefit being sought purely for the plaintiff is certainly also a factor o Turner should accordingly get ½ indemnity • Mailhot simply paid for his costs at his discretion and only for his benefit – should have to pay back 40K which will be used to indemnify Turner for future costs (Baron – very unique order here, shows flexibility) R: using company funds to defend an action for the sole benefit of the shareholder – D will have to pay back Re BCE vs Peoples Department Stores Peoples and BCE made a really big mess and we need more cases to go to trial about breach of duty, etc. “to the extent that People’s and BCE are indeed followed by lower court judges, they are likely to lead to different and contradictory readings in different courts, at different times, and by different judges” – Jeffrey MacIntosh Baron thinks it is very unclear • Directors must consider the best interests of the corp. • It may also be appropriate (not mandatory) to consider the impact of a corp. decision on shareholders or particular groups of stakeholders (Directors need to take a look around) o When they are considering what is in “the best interests of the corp.”, directors may look at the interests of: shareholders, employees, creditors, consumers, gov’t, and the environment • Always comes back to the best interest of the corporation, not any particular group Access to justice versus frivolous litigation • 232(1)(c) complainant [must be] acting in good faith; But, we need to ensure that everyone has access to justice • But, we need to balance this need with our Barristers’ & Solicitors’ Oath, that we will not promote suits on frivolous pretenses, etc. (more so in US, where many people use courts as a time/resource waster) • BCA s.232 strikes a balance: a complainant with a legitimate cause of action is permitted to proceed, but a complainant acting not in good faith is not Personal Action: some causes of action are personal to the individual shareholder(s) (ie. plain old litigation) • a civil cause of action against a Director for breach of duty of care • E.g. alleged negligence, as in the facts in Peoples, UPM, Bata • s.142(1)(b) does not name a beneficiary – duty of care is owed to a broad range of beneficiaries • a personal action alleging that the Directors acted in bad faith • E.g. Smith v. Fawcett – an example where the individual plaintiff had standing to challenge the directors’ actions (right person to bring the claim – they are allowed to make that challenge) Personal actions for shareholders • Look for “interference by the company with the rights of certain shareholders” • • • For example: 1. changing the rights attached to one class of shares 2. depriving a shareholder of rights conferred to him by the Articles 3. altering the structure of the corp. in a manner that amounts to fraud on the minority 4. depriving a shareholder of her right to vote (pretty common, clear example of where rights are affected, and the deprived person has standing to bring an action against directors) examples may have been done by one group of shareholders (majority) to another (minority), depriving rights or, examples could be caused by directors acting for a collateral purpose and causing the corp. to act in a manner that deprives a group of shareholders of their rights o i.e. the “bad guys” could be the majority shareholders, or, the directors If the directors perform an ultra vires act (i.e. they do something forbidden by the Articles) or do something illegal • It is likely there would be both a personal action and a corporate action (derivative action) o Causing damage to the whole company, and the shareholders at the same time o “the fact that the second alternative is a possible one is no reason for refusing to allow a member [shareholder] to sue the company if he has an independent right to do so” Goldex Mines v Revill [1975] F: Goldex was a shareholder of Probe Mines; dispute among Probe directors over proposed purchase of gypsum claims from a company controlled by a former Probe director – Goldex alleged breaches of duties by directors and defendant shareholders, but did not specify whether duties were owed to Probe or to its shareholders A: If you want to sue for both (derivative and personal), must separate them clearly • For derivative actions, you must do the two step process and apply for leave beforehand; this has not been done so the derivative action cannot be judged • There is also an element of personal action here – if wrongs were committed against an individual, ‘the company cannot sue for my injury, it can only sue for its own’ • However, claims are not properly pleaded – personal elements are inextricably woven into the derivative claims • Could give leave to amend, but will just strike out the writ – no limitation period, so the writ can be remade o Also, P could apply for leave for derivative action, and add the derivative claims to the personal claims Hercules Management v E&Y [1997] F: H went into insolvency; Shareholders brought personal action against E&Y saying reports from 1980-1982 were negligently prepared, and as a result they lost money on their investments A: But, the shareholders were not harmed in two different ways here – they were harmed as one member of a collective group that was all harmed in the same way – must bring action as a derivative and not a personal action • In supervising management (through looking at resolutions adopted at meetings), the shareholders are acting as a body in respect of the corporation’s interests rather than as individuals in respect of their own ends • Interest of shareholders in proper management is indistinguishable from the interest of the company itself o Any loss suffered by shareholders will be recouped in a claim brought on behalf of the company Oppression remedy – does the majority still rule? A basic principle of corporate law is Majority Rule: 1. The majority voting shareholders decide who the directors will be, and then those directors run the corp 2. The majority voting shareholders also determine the outcome of shareholder resolutions; 3. But, there is potential for directors and/or majority shareholders to act in a way that is oppressive or unfairly prejudicial to the minority shareholders • the Oppression Remedy was created to give minority shareholders a remedy in those situations • It allows judges to use the statute (s.227) to change the nature of majority-minority relationships in corp law • Historically, majority rule prevailed, but now: o The majority rule still prevails except when it is oppressive or unfairly prejudicial to the minority [CBCA adds a 3rd category – unfair disregard, but not in BC] o we still look at both common law and statute • this remedy is available to a wide range of stakeholders, if harm has been done to them (must have been actually harm done): security holders, creditors, directors, officers, etc. o • • • very broad: “and any other person whom the court considers to be an appropriate person to make an application under this section” What is the difference between breach of fiduciary duty and the oppression remedy? o Breach of FD is one kind of mischief; the OR is a remedy that can be used to fix it (cause and effect) o There is significant overlap, but not 100% overlap Oppressive conduct is broad (e.g. majority use their powers in a way that is unfairly prejudicial to the minority) o Breach of Fiduciary Duty is narrower class within oppressive conduct (e.g. unfair self-dealing) Canadian courts have allowed derivative actions to proceed under the oppression remedy (p801) o An oppression remedy can also be used in some personal actions o If you are dealing with a corporation in some stakeholder role, and the corporation is harmed or you are harmed personally, there are two paths you can take, but you can use the oppression remedy for either Re BCE [2008] F: directors chose 1 out of 3 choices to sell BCE; the debenture holders (banks) allege directors were oppressive TJ: banks have standing to bring an action, asking for this remedy, but they were not successful SCC: did the trial judge err in dismissing the claim? • There are two possible approaches involved with the statutory oppression remedy 1. A strict reading of the statute (oppression or unfair prejudice), as stated in some case law? • No. “A categorical approach to oppression is problematic because the terms cannot be put into watertight compartments or conclusively defined” o “The statutory components of oppression are really adjectives that try to describe inappropriate conduct; the difficulty with adjectives is they provide no assistance in formulating principles that underline court intervention” – SCC needs to come up with an effective way for lower courts to follow 2. What about broader principles that underlie and unite the various aspects of oppression? • “In our view, the best approach…is one that combines the two approaches – it is fact specific” • First, we should look at the broader principles underlying the remedy, in particular, what were the reasonable expectations of the person alleging they were harmed? • Then, if the complainant can establish a breach of reasonable expectations, the court will move forward and look at whether the conduct was actually oppressive or unfairly prejudicial First Edmonton Place v 315888 Alberta [1988] F: complainant seeking leave under oppression remedy; FE contends that a lease is a security of the corporation that brings them within the definition of ‘complainant’ under the act A: security: debt obligation of a corporation, and a certificate evidencing that obligation • Creditor can be a ‘complainant’ if they hold security that is capable of being registered in the registrar or corps • Under ‘proper person’ (BCA = ‘appropriate person’) category could be broader; two circumstances where creditor would be entitled to standing as proper person: o (1) act by directors constitutes using the corporation as a vehicle for committing fraud on applicant o (2) act by directors constitutes a breach of underlying expectation of applicant § did circumstances that gave rise to lending include an element which prevented creditor from taking adequate steps to protect their own interests? Ebrahimi v Westbourne Galleries [1972] F: partners with lucrative business, who bought/sold expensive rugs – decided to incorporate, were sole shareholders and took directors salaries – one of their sons grew up, and each partner transferred 100/500 shares, entered board – father and son had fight with other partner; passed resolution to remove him • Ebrahimi brought action to have the company winded up A: After reviewing long line of cases, common thread is distilled in the words “just and equitable”: the words are a recognition that a limited company is more than a mere judicial entity, with a personality in law of its own; connected to it are individuals with rights, expectations and obligations • Oppression remedy is available to minority shareholders is available if 1+ of the 3 elements is satisfied: o (i) the association formed on basis of personal relationship involving mutual confidence o (ii) understanding that all, or most, of the shareholders shall participate in the conduct of the business o (iii) restriction on transfer of shares among management (so someone can’t pick up and leave) • it was in Ebrahimi’s reasonable expectations that he would continue to manage as a director • E was oppressed because he was trapped as shareholder, no longer on BoD (wont let him sell his shares) o Money is all tied up in the corporation Category of applicants for OR is very broad – used to seek fairness/justice/equity – very fact specific, and courts have broad discretion to come up with a remedy C: Just and equitable to have the company wound up and Ebrahimi paid his capital • Ferguson v Imax Systems Corp [1983] F: Imax systems corp had founding shareholders of 3 couples – one couple divorced and they tried to squeeze the wife out by passing resolutions – changing her shares to limited, non-voting shares that did not receive dividends; F said it was unfairly prejudicial A: here we have a small, closely held corporation controlled by small number of individuals • F’s work and role with the company is important; the fact that the group intends to deny her any participation in the growth of the company o The resolution authorizing the change is culminating event in a lengthy course of oppressive and unfairly prejudicial conduct o She is the only shareholder that is affected, and was not a small investor who came on at a later date C: Set resolution aside Naneff v Con-Crete Holdings [1995] F: father built family business, gave shares to two sons; parents did not like one of their sons lifestyles and wanted him out – removed him from the company, do not let him participate in management anymore TJ – gave OR that the family business can be sold to anyone that wants to buy it On appeal: TJ remedy went too far – OR cannot be punitive, only used to rectify the situation (restore fairness – put things back in the middle) • N senior was going to keep control for life, was not about to hand over control to his sons • What were the reasonable expectations of the son? • Having family business sold to anyone in public market was not one of those expectations • TJ gave an inappropriate remedy – appeal proposed different remedy where shares are purchased at fair market value (buying him out would have been fair)