Monday March 15 2021
The Directors Of A Company Oppressed Me As A Shareholder. Can They Hide Behind The Company’s Responsibility?
You are a significant shareholder, owning promising shares in a growing company. Everything is going well until the directors of the firm make a questionable and unjustified decision that directly affects your shares in that given company. You then ask yourself : Could personal liability for oppression be imposed on these corporate directors? The answer is yes, possibly!
If this has happened to you, well, you are not alone. In the Supreme Court case Wilson v. Alharayeri, 2017 SCC 39, Mr. Alharayeri was a significant minority shareholder of the company Wi2Wi. He was the sole owner of convertible preferred shares which were issued to him as performance-linked incentives. Unfortunately, he was the victim of an act committed by two of the directors at that time. Mr. Wilson and Mr. Black, the directors in question, had issued a private placement of convertible secured notes to its existing common shareholders. The private placement would have a substantially diluted on the shareholdings of any shareholder who did not participate, and that was Mr. Alharayeri’s case. The Supreme Court, unanimously, dismissed the appeal and reinforced the notion that directors can and should be held personally liable for oppression.
If you think that the directors of a company of which you own shares may be subject to personal liability because of oppressive acts, here is a two-pronged test set forth by the decision Budd v Gentra Inc., composed of two fundamental conditions:
- Is the director or officer implicated in the oppressive conduct, either by action or inaction?
- Is the infliction of personal liability fit in all the circumstances?
As the first part of the test requires little interpretation, the second part should be discussed in further detail. Therefore, we are going to demystify it by dividing it into 4 principles identified by the Supreme Court, to see if you are in a case of “fit” circumstances for engaging the personal liability of the directors that have wronged you.
I. Personal liability must be applied with fairness in mind and tempered on case-by-case basis:
You must keep in mind that each case is a case in point and that there are many factors to take into consideration. It is also important to know that to find liability in a director does not necessarily mean that the courts must choose between the responsibility of the director or the company’s. As a matter of fact, the court could rule that fairness lies in a shared responsibility of the two entities. Both entities, the director and the company, could be held responsible and might have to share the responsibility of compensating the shareholder affected by the oppression, if that is the fairest option.
You may think that the stepping-stones of a director’s personal liability are personal benefit and bad faith, yet the Supreme Court ruled that there could be personal liability despite the absence of personal benefit or of bad faith.
Here are 5 questions associated with scenarios that are symptomatic of oppressive behaviours from the directors and which could justify a call for personal liability as a “fair recourse”.
- Did the directors obtain a personal benefit from their conduct?
- Did the directors increase their control of the corporation by the oppressive conduct?
- Did the directors breach a personal duty they have as directors?
- Did the directors misuse a corporate power?
- Could a remedy against the corporation prejudice other security holders?
II. An order assigning personal liability should only go as far as necessary to rectify the oppression.
The objective is not to punish the director, but to remedy the faulty behaviour. An exemplary remedy that was applied to Mr. Alharayeri’s case was personal compensation payable by the directors at fault, for the loss in value of his shares.
III. Personal liability may serve only to vindicate the reasonable expectations derived from an individual's status as a security holder, creditor, director or officer.
In attributing personal liability to the directors, one of the objectives is to reiterate the reasonable expectations coming with the title of director. The same applies to the status of officer or creditor, or any other individual having an official status in a company.
IV. A court should consider the general corporate law. A director’s liability cannot be a surrogate for other forms of statutory or common-law relief.
The general corporate law and its remedy should always be considered first by the Court when attempting to establish a remedy for the personal liability of the directors.
In a world where people create more and more companies to dissociate their responsibilities from the companies’ responsibilities, it is important to remember that having a company does not give administrators or directors full immunity. A director of a company could be held personally liable if one of their decisions oppressed you personally. If you are in front of a judge and there are, in fact, signs of clear oppression, you might be able to obtain a “fair” compensation or solution on a fact-by-fact basis. To know your rights and remedies with regard to director’s personal liability, please speak to your attorney.
Emmanuel Kouzelis, Attorney-at-Law
With the collaboration of Laurence Douyon and Michael-Peter Garios, Articling Students
Alepin Gauthier Avocats Inc.
This text contains legal information of a general nature and should not replace legal advice with a lawyer or notary who will take into account the particularities of your situation.