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A breakdown of corporate relationships can occur for several reasons, including: dishonesty, theft, fraud, or differing visions for the company. Without clear shareholder agreements in place, these disputes can easily develop into an oppression case, where one or more shareholders treat other shareholders unfairly.
Fortunately, corporations are governed by both federal and provincial statutes. The Ontario Business Corporations Act (the “OBCA”) and Canada Business Corporations Act (the “CBCA”) provide for the oppression remedy, which addresses a broad range of unfair conduct between shareholders and stakeholders and imposes responsibility on corporations to act as good corporate citizens.
The Oppression Remedy
The oppression remedy is a personal remedy available to shareholders and other stakeholders in a corporation. It can be asserted against a corporation or any of its affiliates. Canada has broad oppression remedies compared to the United States, where oppression remedies only apply to oppressive conduct of majority shareholders against minority shareholders. In Canada, claims can be asserted by other stakeholders in a corporation, such as minority shareholders, majority shareholders, equal shareholders, officers, directors or creditors.
Types of Oppression
The oppression remedy protects against a wide range of unfair conduct. The conduct generally falls into one of three categories:
- Oppression occurs when there is a serious wrong committed intentionally, such as an abuse of power or coercive behaviour.
- Unfair prejudice occurs when a party mistreats another stakeholder, such as wrongfully squeezing out a minority shareholder, diluting the shares of one party, or changing the corporate structure to alter debt ratios. In this category the offending party has a less culpable state of mind than in oppression.
- Unfair disregard occurs when another party ignores the claimant’s interest without necessarily intending to cause harm, such as failing to prosecute claims, improperly reducing dividends or breaching fiduciary duties owed to the corporation and other shareholders.
Not all harmful conduct can be used to initiate a claim under the oppression remedy. A corporation with several stakeholders will often have internal conflicts. Corporations that manage internal conflicts while treating individual stakeholders equitably and fairly may not be guilty of oppression simply because they made a decision that contradicted a shareholder’s interests.
Making a Claim
In order to advance a claim, the injured party must first prove that they held a reasonable expectation of the corporation. The reasonableness of the expectation is determined by an objective standard. The injured party must then advance evidence proving that the corporate conduct failed to meet that reasonable expectation, causing detrimental consequences amounting to oppression, unfair prejudice or unfair disregard. Damages must be proven through evidence, often requiring a report or testimony from a business valuation expert.
Arbitration vs Litigation
Oppression remedy disputes can be resolved through arbitration or litigation. It is important to consider the positives and negatives of both options.
While the oppression remedy protects shareholders and other stakeholders from a variety of unfair conduct, it is vital to take steps to further protect yourself before becoming a shareholder. A commonly used tool is the Shareholder Agreement, which can outline what procedures the corporation will follow to resolve disputes and the duties and responsibilities of each shareholder, among other things. An effective Shareholder Agreement can limit the possibilities of oppression. See our post, “The Shareholder Agreement: A Tool for Avoiding Disputes”, for more information.
Interim Legal Costs
The OBCA and CBCA give plaintiffs the opportunity to apply to the court for an order requiring a corporation to compensate the plaintiff for interim legal costs required to sue that corporation who has oppressed the plaintiff. The plaintiff must show that the oppression caused impecuniosity and financial difficulty and must demonstrate the necessity of the payment of legal costs to advance the litigation.
Oppression claims are a complex area of law, often requiring expert evidence. A corporate lawyer can assist with advancing the strongest case and can tap into their network of experts to ensure you are seeking the full amount of damages available to you.
Please contact Michael Paiva for more information about the oppression remedy, or if you require assistance with a shareholder dispute.