The oppression remedy is a valuable legal tool that allows for redress when corporate conduct is oppressive or unfairly prejudicial to, or unfairly disregards the interests of, shareholders, creditors, directors or officers of a corporation.
At common law, courts are quite hesitant to intervene in a corporation’s affairs due to an often-cited rule called the ‘business judgment rule.’ The judiciary has humbly recognized that not only does it lack the material expertise with respect to running a corporation, but that businesses operate in incredibly complex systems. Therefore, a presumption is granted to business directors and executives that in making a business decision, they acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. Accordingly, an officer or director’s decision will be treated with some deference. The standard of reviewing such decisions will not be one of perfection but of reasonableness. In other words, was the director’s decision to – i.e., distribute dividends – reasonable in the circumstances?
In view of the foregoing, courts rarely ‘pierce the corporate veil’ – which is to disregard the separate existence of the corporation for a particular purpose. The corporate veil is usually pierced to allow a creditor of the corporation to enforce its claim against a shareholder.
Federal and Provincial Corporate Statutes
The Canada Business Corporations Act (i.e. the CBCA) and all provincial equivalents (i.e. the Ontario Business Corporations Act or OBCA), officially codify the oppression remedy into law. The provisions provide for a court to make an order to rectify the matters complained of if it is satisfied that conduct was indeed oppressive. Examples of oppressive conduct include:
- Failing to disclose non-arm’s length transactions;
- Refusing to hold an annual general meeting in order to avoid dealing with shareholders;
- Attempts to resist a take-over bid by working against a minority shareholder who is bidding on the Corporation;
- Excessive payments to directors; and
- Payment of dividends when the corporation is insolvent.
To make a successful oppression claim, an affected party must establish that they held ‘reasonable expectations.’ Even though expectations are personally held, what is reasonable is objective and contextual. Courts may take subjective factors into consideration based on the past conduct of the corporation, especially where it is a smaller, closely held corporation with very few shareholders. Importantly, in most cases, representations made in agreements such as shareholder agreements can reflect the reasonable expectations of the parties. Secondly, a claimant must prove that they suffered unfair conduct that led to prejudicial consequences. The focus of this second inquiry is on the effect of the conduct, and not on the intention behind it. Only the effects need to be unfair to make out a claim for oppression.
For further information on this topic, please reach out to one of our Toronto employment lawyers today.