In Wilson v. Alharayeri, 2017 SCC 39, The Plaintiff, Alharayeri, was the president, CEO and a shareholder and a director of the subject Corporation. The subject corporation was incorporated under the Canada Business Corporations Act (“CBCA”). In addition to common shares, the Defendant held convertible A and B preferred shares issued only to him as performance-based incentives. The A and B shares were convertible upon the corporation meeting certain performance targets in 2007. The Plaintiff held convertible C preferred shares, issued to him as an incentive for finding financing. The C shares were convertible into common shares upon the Corporation meeting a specific financial target.
In early 2007, the Defendant, Wilson, began negotiating a merger with Company M to address the Corporation’s cash flow issues. At the same time, the Defendant arranged to sell some of his common shares to Company M as a result of personal financial difficulties. The Corporation’s Board discovered the share sale, leading to the Defendant’s resignation in mid-2007. The Plaintiff became the Corporation’s President and CEO.
The merger with Company C did not succeed. The Corporation’s board of directors decided to issue convertible notes to address the cash flow issues, leading to substantial dilution the of common shares held by any shareholder who did not subscribe to the notes. Before issuing the notes, the Corporation’s board of directors accelerated conversion of the Plaintiff’s C shares. The Corporation’s auditors expressed doubt that the performance target had been met to trigger the C share conversion. The Defendant’s A and B shares were not converted, and the board Board did not notify the respondent of his crystallized conversion rights. As a result of the note issue, the Plaintiff’s proportion of common shares and the value of his A and B Shares were significantly reduced. The Plaintiff filed an application for an oppression remedy under s. 241 of the CBCA. The trial judge found that the Defendant was personally liable for oppression.
On appeal, the Supreme Court considered, among other things, when it appropriate to impose personal liability for oppression can be imposed on corporate directors. The Court distilled the following test from the existing case law:
1. The oppressive conduct must be attributable to the director. The director must have exercised or failed to have exercised his or her powers so as to effect the oppressive conduct.
2. The imposition of personal liability must be fit in all the circumstance:
- The oppression remedy must be a fair way of dealing with the situation. The Court stated that fairness must be addressed on a case by case basis. However, it stated that where a director has obtained a personal benefit, such as immediate financial advantage or increased control of the corporation, a personal order will likely be fair. Also, where a director has breached a duty or misused a corporate power, it may be fair to impose personal liability. Further. where a remedy against the corporation would unduly prejudice other security holders, personal liability may be fair.
- The oppression remedy should go no further than rectifying the oppression.
- The oppression remedy must be a fair way of dealing with the situation. The Court stated that fairness must be addressed on a case by case basis. However, it stated that where a director has obtained a personal benefit, such as immediate financial advantage or increased control of the corporation, a personal order will likely be fair. Also, where a director has breached a duty or misused a corporate power, it may be fair to impose personal liability. Further. where a remedy against the corporation would unduly prejudice other security holders, personal liability may be fair.
- The oppression remedy should go no further than rectifying the oppression.
- The oppression remedy should only respond to reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. The oppression remedy should not be used to address expectations arising from a family or personal relationship. It should not be used tactically to “jump the creditors’ queue.”
- The Court should consider the general corporate law context in deciding whether to grant an oppression remedy. Other statutory or common law relief may be more fitting in the circumstances.
On the factors, the Supreme Court found that the trial judge had appropriately imposed personal liability in oppression on the Defendant.
The lawyers at Gilbertson Davis LLP have experience with business litigation, including oppression claims. Please contact us for an initial consultation.
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