A board’s refusal to act on a shareholder requisition for a shareholder meeting because of the “personal grievance” exception is overturned by the Court.

The case of Koh v. Ellipsiz Communications Ltd., 2017 ONSC 3083, provides guidance to boards refusing to call a shareholder meeting because the meeting is requisitioned by a shareholder to redress alleged personal grievances.

In the Koh case, a shareholder holding approximately 42 per cent of a company’s outstanding shares submitted a requisition proposing that a shareholder meeting be convened to consider two resolutions, one to remove three directors, and if approved, the other to elect three new directors identified in the requisition. The company refused to act on the requisition on the basis that it was for the primary purpose of redressing a personal grievance against the company or its directors. Section 105(3)(c) of the Business Corporations Act (Ontario) allows a board to refuse to call a requisitioned meeting when it clearly appears that the primary purpose of the requisition is to redress a shareholder’s personal grievance. Among the personal grievances the board attributed to the shareholder were his desire to be chairman of the company and to negotiate a potential transaction and financing.

The shareholder then commenced litigation to compel the company’s directors to call the requisitioned meeting, but the Ontario Superior Court held that the requisition was sought to redress personal grievances and declined to order the meeting. On appeal, the Divisional Court agreed with the shareholder, holding that the alleged personal grievances predominantly related to his legitimate differences of opinion regarding the business actions that should be taken by the company, and ordering the company to call a shareholder meeting to vote on the shareholder’s resolutions. The Divisional Court stated [at para. 37 and 40] as follows:

It seems to me that one of the indicators of a person[al] grievance is that the subject matter of that grievance bears no real or direct relationship, nor is it otherwise integral, to the business and affairs of the company, or, for that matter, to the griever’s role as a shareholder. In other words, while the grievance may bear some connection to the business and affairs of the company, that is not at the heart of the grievance. … In this case, the three main complaints are directly related to the business and affairs of the respondent [company]. They also directly affected the [shareholder] appellant’s position as a shareholder. The complaints involve who should be directors, who should occupy corporate positions, and whether a significant transaction should be entered into.

In emphasizing that the shareholders have a substantive right to requisition a meeting that should not be lightly interfered with, the Divisional Court stressed [at para. 45] the following:

That point, coupled with the high threshold that must be met for the exception to apply, and that the onus rests on the Board of Directors to satisfy the court that the exception applies, all suggest quite strongly that any doubt regarding the application of the exception should be resolved in favour of the meeting being held. On that point, it must be remembered that all that is being determined, through this application, is whether a meeting of the shareholders should be held.  No determination as to the proper outcome of the dispute is being made. That is a matter for the shareholders to decide, if a meeting is held.

In light of the foregoing, the Koh case should be taken as authoritative guidance to a board on what constitutes a shareholder’s “personal grievance”, and whether a board is permitted to decline a shareholder requisition. As stated [in para. 16], prior to the Koh case, “there was no case law directly on point regarding the interpretation or determination of what constitutes a personal grievance”.

Courts will not defer to the business judgment of directors who refuse a shareholder requisition by relying on an exception. As stated [in para. 15], “In deciding on the application of the exception, a Board of Directors is not making a business decision and, accordingly, the business judgment rule does not apply” to protect their decision. The right of shareholders holding not less than five per cent of a company’s voting shares to requisition a shareholder meeting continues to be a substantive legal right afforded under Ontario’s Business Corporations Act and the courts will be cautious when asked to deny the exercise of that right.


Oppression remedy is not designed to relieve minority shareholder from limited liquidity attached to shares in the absence of oppressive or unfair conduct.

In the case of Wilfred v. Dare, 137 O.R. (3d) 512, a minority shareholder in a closely held private company could not use the oppression remedy to obtain relief from the limited liquidity attached to her shares or provide her a means of exiting the corporation without proving oppressive or unfair conduct. She did not have a reasonable expectation of liquidity for her shares. The case is a useful reminder of just how limited the rights of a minority shareholder really are but how beneficial a comprehensive shareholder agreement can be.     

In Wilfred, a sister and her two brothers were the only shareholders of a private company involved in the manufacture of cookies, crackers, fine breads and candy. Their father, who had previously gifted the company shares to them in an estate freeze, wanted to keep the shares in the family over the longer term and provide a disincentive for his children to sell their shares to a third party. The sister and her brothers entered into a shareholder agreement that required any shareholder wishing to sell company shares to first offer them to the other two shareholders at fair market value. If the others declined the offer, the shares could then be sold to a third party on equal or better terms. When the sister offered to sell her shares to her brothers, they rejected her offer, and she was unable to find a third party purchaser.

She then brought an oppression action in the Ontario Superior Court of Justice, specifically seeking a court-ordered sale of her shares to her brothers and appointment of a third party valuator to determine the value of her shares upon which the sale price would be based.

The action was dismissed. In summarizing the governing legal principles for the oppression remedy [at para. 59], the Court stated that it needed to make the following two inquiries in deciding an oppression case:

(1) Does the evidence support the reasonable expectation asserted by the claimant? (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?

The Court held [at para. 60 to 63] that the sister did not have a reasonable expectation of liquidity for her shares, as follows:

The primary issue in this case is whether [the sister] Carolyn has proven that she has a reasonable expectation of liquidity for her [holding company] Serad shares – namely, that the defendants will purchase her shares of Serad when she wishes to sell them.  In my view, she has not. … Carolyn received a gift of her interest in [operating company] Dare Foods when Carl transferred the future growth of Dare Foods to his three children through the estate freeze in 1980.  Carl’s intention was to try to keep the shares in the Dare family in the long term and to provide a disincentive for his children to sell to a third party. … Carl did that through the right of first offer in the Second Shareholders Agreement.  However, he did not require his children to purchase shares from one another.  The agreement does not contain a shotgun buy-sell clause.  It does not contain a put right.  It does not require any family member’s shares to be purchased by the others depending on his or her life circumstances.  It creates no obligation on his children.  It only provides them with the opportunity to purchase one another’s shares at fair market value before those shares are offered to a third party. … That is the basis on which Carolyn received her shares of Serad.  It is difficult to see how she could have an expectation that her brothers would purchase her shares when she received her shares on those terms.  She agreed to this provision at the time of the estate freeze in 1980. She agreed to it again when the Serad shares were transferred to her personally in 2001.  Indeed, she was aware of the mechanics of the Second Shareholders Agreement when she tried to sell her shares to her brothers in 2001, 2004 and 2014.  She knew that if they did not accept her offer (which she admits they were not required to do), her option was to try to market the shares to a third party. 

The Court [at para. 66] bluntly described the sister’s position:

The reality is that Carolyn was gifted a minority interest in a closely held private family business.  Her interest has inherent limited liquidity.  Her reasonable expectations must take into account the nature of her position as a minority shareholder.

Therefore, the Court was not prepared to grant an oppression remedy in the circumstances, holding [at para. 70 and 71]:

In my view, the oppression remedy … is not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of any oppressive or unfair conduct.  Carolyn has not suggested that there has been any mismanagement of the corporation, improper dealing or any unfair conduct. … I reject Carolyn’s submission that the refusal of the defendants to purchase her shares is itself a basis for relief. … Further, to the extent that Carolyn is seeking to have Serad use its resources to purchase her shares, she is putting her own interests ahead of those of the corporation.  The uncontradicted evidence of [brothers] Bryan and Graham, both directors of Dare Holdings and Serad, is that the business has significant capital needs in order to maintain its competitive position.  They testified that Dare Foods has begun a series of investments which is unprecedented.  The business has embarked on a phased investment project for new equipment that for the first time will involve the business going into significant debt.  One of its projects – a new line to make cookies – will cost $62 million.  Their evidence is that Dare Foods’ resources are better allocated for these business purposes than to buy Carolyn’s shares.  As the directors with duties to do what is in the best interests of the corporation, they are entitled to make that determination.

In the Court’s view [at para 72], there was no evidence to suggest that purchasing the sister’s shares was necessary for the good of the company:

This is not a case where any difficulties in shareholder relations or irreconcilable differences among family members have had any adverse effect on the underlying Dare Foods business.  Nor is it the case of an “incorporated partnership” where a shareholder has contributed sweat equity to build a business and has been improperly excluded.  Carolyn has never played a role in the Dare Foods business.  She simply wants out. 

In light of the foregoing, the Wilfred case confirms that the oppression remedy is not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of any oppressive or unfair conduct.

But the shareholder agreement in the Wilfred case did not require the shareholders to purchase shares from each other. It did not contain a shotgun buy-sell clause or put right. Had it done so, the outcome for the sister may have been different. While shotgun clauses or put rights may not be appropriate for the shareholders of every closely held private company, especially when there may be a great disparity in the personal needs and financial resources of the individual shareholders, or when the company itself may lack sufficient liquidity or solvency, a shareholder agreement providing mechanisms for shareholder exit may help deter the kind of litigation that took place in Wilfred.

Private company minority shareholders have, in the absence of a shareholder agreement, relatively few rights or reasonable expectations. Such rights or expectations were summarized in the following excerpt from the decision in Senyi Estate v. Conakry Holdings Ltd., found at para. 67 of the Wilfred case:

(1) that the directors and officers will conduct the affairs of the corporation in accordance with the statutory and common law duties required of them in such capacities; (2) that the shareholder will be entitled to receive annual financial statements of the corporation and to have access to the books and records of the corporation to the limited extent contemplated by the Act; (3) that the shareholder will be entitled to attend an annual meeting of the corporation for the limited purposes of receiving the annual financial statements and electing the directors  and auditor of the corporation, or will participate in the approval of such matters by way of a shareholder resolution; (4) that a similar approval process will be conducted in respect of fundamental transactions involving the corporation for which such approval is required under the Act; and (5) that the shareholder will receive the shareholder’s pro rata entitlement to dividends and other distributions payable in respect of the common shares of the corporation as and when paid to all of the shareholders.

Even though the sister in the Wilfred case could not “cash out” since she was unable to sell her shares to her brothers or to the company, or find a third party purchaser, she nonetheless continued to be entitled to receive her pro rata entitlement to dividends and other distributions when paid to all of the shareholders, a result that seems far from oppressive or unfair.


Vendor is allowed to retain a large deposit even when suffering no actual damages as a result of the purchaser’s failure to close a transaction. 

In the case of Redstone Enterprises Ltd. v. Simple Technology Inc., 2017 ONCA 282, the Ontario Court of Appeal overturned a decision granting partial relief from forfeiture of a purchaser’s deposit after the purchaser failed to close a real estate transaction, and set out the factors to consider when determining whether it would be unconscionable to require a purchaser to forfeit its deposit.

The transaction in Redstone involved the purchase of a warehouse in Brantford, Ontario for $10,225,000. The purchaser planned to use the warehouse to start a marijuana grow-op business, but first required financing and a license from Health Canada. In addition to the initial deposits of $300,000 paid under the agreement of purchase and sale, the purchaser paid a further deposit of $450,000 to secure an extension of the closing date when the Health Canada license took longer than expected. The purchaser could not get the necessary financing or Health Canada license, and failed to close the transaction. When the purchaser refused to agree to a release of the deposits being held in trust by a third party, the vendor brought an application before the Ontario Superior Court for a declaration that the vendor was entitled to be paid the deposits.

Although a court has discretion to grant relief against penalties and forfeitures under the Ontario Courts of Justice Act, a purchaser claiming relief from forfeiture must meet a two-part test. Firstly, the proposed forfeited sum must be out of proportion to the damages suffered by the vendor, and secondly, it would be unconscionable for the vendor to retain the deposit paid. The trial judge found that there was no evidence before the court as to whether the vendor suffered any damages, and was therefore unable to determine whether the $750,000 deposits were proportional to damages suffered. However, the trial judge concluded that $750,000 in deposits reached a level where complete forfeiture became unconscionable, in the absence of any evidence concerning damages suffered by the vendor, and consequently granted partial relief, ordering that only $350,000 of the purchaser’s total deposit be forfeited to the vendor.

When the vendor appealed, the Court of Appeal of Ontario found that a lack of evidence of any damages suffered by the vendor did not render forfeiture of the deposits unconscionable. While a disproportionately large deposit may be unconscionable in some circumstances, the Court of Appeal [at para. 25 to 26] stated as follows:

I would agree that the finding of unconscionability must be an exceptional one, strongly compelled on the facts of the case. … Can unconscionability be established purely on the basis of a disproportionality between the damages suffered and the amount forfeited? While in some circumstances a disproportionately large deposit, without more, could be found to be unconscionable, this is not such a case.

The Court of Appeal continued to discuss [at para. 28 to 30] what might make a deposit “disproportionately large” or “unconscionable”:

I would be reluctant to specify a numerical percentage, since much turns on the context. I note, however, that in this case the deposit was slightly more than 7%. There is no evidence that this was a commercially unreasonable deposit. … Where, as here, there is no gross disproportionality in the size of the deposit, the court must consider other indicia of unconscionability. This is an analysis the application judge did not undertake. By failing to do so, then he erred in law. … The list of the indicia of unconscionability is never closed, especially since they are context-specific. But the cases suggest several useful factors such as inequality of bargaining power, a substantially unfair bargain, the relative sophistication of the parties, the existence of bona fide negotiations, the nature of the relationship between the parties, the gravity of the breach, and the conduct of the parties.

While the Court of Appeal suggested that there may have been hard bargaining between the parties, it concluded [at para. 32 to 36] that there was no unconscionability in this case after it looked at a variety of factors, as follows:

This was a straightforward commercial real estate transaction undertaken in the expectation of profit by both sides, who were previously strangers. There was no inequality of bargaining power between them. There was no fiduciary relationship. Both parties were sophisticated. … The effect of fixing a price for the property created some risk for both parties because of the possibility of fluctuation in the market value of the property over a long closing period. The initial deposit demonstrated the buyer’s commitment to the property. That commitment was increased when the buyer waived the conditions inserted in the Agreement of Purchase and Sale for its benefit, requiring it to increase the amount of the deposit. … Later, when it appeared that the buyer needed an extension of the closing date, it sought that extension offering an additional $200,000 deposit, demonstrating it knew the seller would be concerned about the buyer’s ability to close the transaction and would seek to hedge against that risk. Further, by extending the closing date, the seller would lose any opportunity to sell the land for the then market price, which could change at a later date. Negotiations resulted in the additional deposit being set at $450,000, higher than the $200,000 figure the buyer initially offered. The total deposit at slightly more than 7% was not in an unfair range. … As the closing date approached, the buyer attempted to escape from the transaction by raising spurious complaints, which led to the application. The application judge rightly found that there was no merit to the complaints. At the same time, the seller remained ready and willing to close and was prepared to extend without additional payment. … In my view, nothing in this sequence suggests that the seller unconscionably abused its bargaining power. Perhaps its position might be described as hard bargaining, but it was not unconscionable in the commercial context.

Although the Court of Appeal noted the general rule that an amount subject to forfeiture resulting from a breach of contract is unlawful, unless that amount represents a pre-estimate of damages suffered, it emphasized that deposits paid pursuant to a contract for the sale of land are an exception. Accordingly, a deposit may be forfeited, even if the deposit amount has no reference to the vendor’s anticipated damages.

In light of the foregoing, the Redstone case makes it clear that where there is no evidence of gross disproportionality in the size of a deposit, the court must consider the full commercial context when assessing whether forfeiture of a deposit is unconscionable. In Redstone, the Court of Appeal considered a variety of factors, including any inequality of bargaining power between the parties, their level of sophistication, the existence of any fiduciary relationship between them, and the willingness of the parties to close

In short, a finding of unconscionability will only be made in exceptional circumstances. Even though a vendor may drive a hard bargain in its request for deposits, such circumstances do not constitute unconscionability, and the vendor will likely be entitled to keep the deposits should the purchaser fail to close regardless of whether the vendor suffered any damages. After all, possible forfeiture of the deposits was part of the bargain struck by the parties in the first place.


The Supreme Court of Canada has clarified the criteria to be used when imposing personal liability upon directors for corporate oppression.

In the case of Wilson v Alharayeri, 2017 SCC 39, the Supreme Court of Canada affirms the decisions of the lower courts holding two directors personally liable to pay compensation to a minority shareholder in an oppression claim brought under section 241 of the Canada Business Corporations Act (“CBCA”).

The Wilson case involved a wireless technology company that issued a private placement of convertible notes which substantially diluted the proportion of common shares held by any shareholder who did not participate in it. Prior to the private placement, the company’s board of directors refused to convert into common shares the Class A and B convertible preferred shares held by a former director even though his shares were convertible based on the financial tests laid out in the company’s articles of incorporation and its audited financial statements. Yet the board accelerated the conversion of the Class C convertible preferred shares held by the company’s President despite doubts expressed by the auditors over whether the test to convert these shares into common shares had been met. The private placement substantially reduced the former director’s proportion of common shares and their value, causing him to initiate an oppression claim.

The trial judge held the President and the chair of the company’s audit committee, as the only two members of the audit committee, personally liable for the board’s refusal to convert the former director’s Class A and B convertible preferred shares into common shares, and for the failure to ensure that the rights of the former director as a shareholder were not prejudiced by the private placement. Both directors advocated before the board against the conversion of the former director’s shares. When the trial judge’s decision was upheld on appeal, the case went before the Supreme Court, which was essentially asked when personal liability for oppression may be imposed on corporate directors.

In confirming that section 241 of the CBCA gives a trial court broad discretion to make any interim or final order it thinks fit and enumerates specific examples of permissible orders, the Supreme Court held that some of the examples show that the oppression remedy contemplates liability not only for the company but also for other parties, although the CBCA’s wording goes no further to specify when it is fit to hold directors personally liable under the section.

The Supreme Court stated at least four general principles should guide courts in fashioning a fit remedy under section 241, and the question of director liability cannot be considered in isolation from them. These general principles are summarized by the Supreme Court [at para. 49 to 55] as follows:

First, the oppression remedy request must in itself be a fair way of dealing with the situation. … Where directors have derived a personal benefit, in the form of either an immediate financial advantage or increased control of the corporation, a personal order will tend to be a fair one. Similarly, where directors have breached a personal duty they owe as directors or misused a corporate power, it may be fair to impose personal liability. Where a remedy against the corporation would unduly prejudice other security holders, this too may militate in favour of personal liability. … But personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct. … Where there is a personal benefit but no finding of bad faith, fairness may require an order to be fashioned by considering the amount of the personal benefit. In some cases, fairness may entail allocating responsibility partially to the corporation and partially to directors personally.

Second, as explained above, any order made under s. 241(3) should go no further than necessary to rectify the oppression…. This follows from s. 241’s remedial purpose insofar as it aims to correct the injustice between the parties.

Third, any order made under s. 241(3) may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. … Accordingly, remedial orders under s. 241(3) may respond only to those expectations. They may not vindicate expectations arising merely by virtue of a familial or other personal relationship. And they may not serve a purely tactical purpose. In particular, a complainant should not be permitted to jump the creditors’ queue by seeking relief against a director personally. The scent of tactics may therefore be considered in determining whether or not it is appropriate to impose personal liability on a director under s. 241(3).

Fourth — and finally — a court should consider the general corporate law context in exercising its remedial discretion under s. 241(3). … Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly where such other relief may be more fitting in the circumstances.

In applying these four general principles, the Supreme Court agreed with the trial judge in holding the two directors personally liable for the oppression. As the only members of the audit committee, they played the lead roles in board discussions resulting in the non-conversion of the prior director’s A and B shares, and were therefore implicated in the oppressive conduct. In addition, the President derived a personal benefit from the oppressive conduct since he increased his control over the company through the conversion of his C shares into common shares (which was not the case for the C shares held by others), allowing him to participate in the private placement despite issues as to whether the test for conversion had been met. This was done to the detriment of the former director, whose own stake in the company was diluted due to his inability to participate in the private placement. The remedy went no further than necessary to rectify the former director’s loss, as the amount awarded corresponded to the value of the common shares prior to the private placement, and vindicated his reasonable expectations that his A and B shares would be converted if the company met the applicable financial tests laid out in its articles and that the board would consider his rights in any transaction affecting his A and B shares.

In light of the foregoing, the Wilson case illustrates that directors may be held liable for acts of corporate oppression so long as the circumstances satisfy the above tests outlined by the Supreme Court. Any director who has acted in bad faith and has derived a personal benefit in connection with oppressive corporate conduct is likely to be personally liable for it.

Owners and managers of private companies are often faced with the challenge of re-opening negotiations which have stalled. Whether they are trying to complete a contract or transaction, or resolve an ongoing business dispute, their frustration with being unable to get a deal will likely lead to their search for ways to break the deadlock. While not every strategy or technique they might consider will be available to them, or will work if tried, there are at least a number to choose from. This blog post will explore the options.

It’s helpful for those owners and managers considering the options to first reflect upon the possible causes of the deadlock. If a conflict between the negotiating companies has escalated and become more difficult to resolve, has the group psychology changed? Since such negotiations are often conducted by their respective teams of company employees, have some members of each team become more competitive or dominant, or have members with more moderate views been pressured into more extreme positions, or have cohesiveness and solidarity become the team’s overriding goal?

Or has the individual psychology changed? Have individual members become more inclined to blame those on the other team, or even those on their own team? Have the members of both teams lost respect and empathy for the others, or concluded that the negotiation is necessarily a zero-sum game with no prospect for a “win-win” outcome?

While the psychology at play may seem to be an obstacle, the team members may eventually come to accept that continuing the conflict is more unpleasant than settling it, and that they should attempt to re-open the negotiations by using some of the methods described below.

One of the first avenues they might choose to explore is the appointment of an intermediary to intervene, preferably someone perceived by both sides as being impartial and objective, and perhaps regarded as wise, with at least some moral authority. Often used in dispute mediation prior to embarking on arbitration or litigation, such a “neutral” shuttles back and forth between the parties in search of a resolution, acting as a facilitator to encourage the parties to brainstorm and generate various problem-solving ideas. Even if the intermediary is not impartial when intervening and personally desires a certain negotiated result, his behind-the-scenes conversations may be enough to loosen hardened positions if he has the respect of both sides.

Another approach, somewhat related to the appointment of a neutral mediator and useful when the parties recognize the problem causing the deadlock, is the appointment of a team of experts who will study the problem and recommend ways of solving it. Providing a “cooling-off period” and allowing those involved in the negotiations to step aside for a while, the experts bring a fresh perspective and the potential to learn new information and come up with creative solutions. Even if the recommendations of the experts are eventually rejected by the negotiating parties, they will provide a focus for the re-opening of the negotiations with possibly different dynamics. Whether the expert teams consist of tax accountants, software programmers, environmental engineers, business valuators or other specialists, the compromise solution they arrive at may well be enough to get the negotiations back on track, especially if it is regarded as an objective, commonly held benchmark.

While engaging outsiders to come up with a solution to break a negotiation logjam may be an acceptable course to take for some negotiating parties, others will not want any third parties to be involved at all. Whether they are concerned about possible loss of privacy and confidentiality of their affairs or loss of control of the process, or they are afraid of having an imperfect solution imposed upon them, or are wary of the expense and delay incurred by involving an outsider to obtain an uncertain result, they may prefer to keep the negotiations to themselves and exercise more “self-help” in overcoming the deadlock.

Either side might then simply try to “break the ice” by engaging in acts of kindness or making polite gestures to the other side, perhaps by way of a small gift or an apology, indicating their willingness to the other side to be more co-operative. They might even admit that their communication style could be better.

Or if the other side does something helpful, they might express thanks or be helpful in return. This promotes repetition of co-operative acts, sending conciliatory signals without conveying any message of weakness.

Often negotiations can be re-opened by a proposal to discuss procedural matters or rules, such as suggesting a neutral location for a meeting, the agenda for such a meeting, the time limits for discussion, or the method for keeping records.

Following procedural suggestions with suggestions as to which issues should be given priority whenever the parties resume their discussion may provide an incentive to return to the negotiating table. While this option requires the parties to acknowledge their deadlock, it at least forces them to list the various issues from those most important to those least important from their perspective, and encourages them to return with their list of priorities in the hope that there might be enough trade-offs to eventually arrive at a bargain. Creating the list allows each party to clarify what it is asking for and why, and reminds each party that it will seldom achieve everything it wants and that it must give up a few things to be realistic.

If setting such priorities does not seem possible for the parties, they may instead be able to identify a few things they each have in common. Despite their many differences, they may both share a couple of overriding goals, or have a mutuality of interest in certain things, such as their reputation among customers and suppliers within their industry, or the need for them to work together in the future. Reminding each other of these may be sufficient to get the parties to resume their negotiations.

If finding something in common between them is difficult, it may still be possible for each party to generate one or more acceptable solutions as a means of indicating their flexibility in the process even though their original demand will remain entrenched and unsatisfied. For example, instead of continuing to insist upon a specific dollar amount, one of the parties might suggest a generally accepted range of dollar amounts appropriate for the issue being addressed.

One technique often used to restart negotiations is for one party to acknowledge the other’s interests, demonstrating that those interests have been heard. By listening and re-stating what the other party has said, a willingness to understand the other’s interests and feelings is indicated. Any ambiguity may be clarified as well.

When each party states its own interests, it allows that party to move off its initial, perhaps hardened, position so long as whatever solution the parties may arrive at, their solution will incorporate those interests. While one party may oppose the initial position taken by the other, it will be difficult to oppose the interests of the other. The parties may then be prepared to carry on with their negotiations by surrendering their initial positions without surrendering their interests.

For a party that has always insisted that its solution towards arriving at an agreement is the only solution, and that it will not unilaterally make any concessions, it is difficult to get that party to move off that position. It may be necessary for the other party to offer something in return, asking whether they have something of value they might exchange. This approach is often called “tit for tat” negotiating, or even “haggling”, although it not normally regarded as an acceptable alternative to other methods which reflect the view that negotiation is essentially an exercise in problem solving, or at least an exercise in focusing on party interests, not positions.

But the tit for tat method may work when other methods have failed in getting a party to budge from its initial position. When a conflict is quite entrenched or longstanding, a minor unilateral concession by one party may motivate a positive response from the other, possibly encouraging a series of small, trust-building exchanges. The smaller concessions may lead to concessions on the bigger issues so long as trust between the parties is maintained.

Depending upon the group psychology mentioned above, another strategy which a party may use to break the stalemate involves identifying the division within its own negotiating team between “hawks” and “doves” and the need to satisfy both of them before a solution can be proposed. That party may say that it has to please its whole team, including those who vehemently oppose giving up on the initial position, namely the hawks, as well as those who are prepared to explore a number of possible solutions, namely the doves. The intention here is to convey a message that the team is not being belligerent, but is just divided, and the other party should understand that division and help to jointly find a way to placate the hawks.

Sometimes the refusal of the parties to talk about solutions proposed in the past makes them more receptive to talk about other things, softening their resistance to further negotiations. By rejecting past proposals as being totally unacceptable and possibly inflammatory, they may then invite each other to search for answers among the alternative solutions which are available. While expressing their frustration caused by recycling rejected solutions, they display some flexibility towards generating new ideas.

While many of the foregoing techniques often succeed in breaking negotiation logjams, there are times when they fail, and tougher measures may have to be tried instead.

Sometimes it may be necessary for one of the parties to threaten unpleasant consequences for both parties in order to get them to work harder to find a solution. While this approach can make things worse if it simply repeats threats that have been made in the past, it can cause the parties to get serious if the threat is presented without hostility and expresses a concern of mutual harm that might be painful though not catastrophic. By suggesting that the harm is inevitable and systemic, rather than chosen and intended, it removes any inference that the threat is vindictive or malicious.

If threatening an undesirable consequence fails to get a reaction, it may be necessary to resort to litigation. Preparing and filing a claim with a court against a party refusing to negotiate tends to get the attention of the refusing party. Often the purpose of such an action is not to ultimately obtain a decision of the court but to impose a process upon the parties to deal with their differences.

The various procedures flowing from a court claim offer a number of advantages in getting the parties to engage each other. Ordinarily the imposition of specific deadlines for exchanging information is enough to get the parties to act. Having to complete court forms requiring clear statements of positions, alleged facts and evidence generally causes the parties to rethink the approach they have previously taken. The time, cost and inconvenience they will incur in following along the court mandated path may provide a sufficient deterrent from proceeding further and instill an earnest want to settle.

The relatively slow pace and inevitable delays frequently associated with court actions tend to provide the parties a significant cooling-off period and afford ample time to reflect upon the costs and benefits of proceeding. The rules of court procedure require a certain level of integrity and civility, and the involvement of lawyers can offer the parties a different perspective on how disputes can be resolved.

But resorting to litigation as a means of breaking a stalemate in negotiations can backfire. Filing and serving a claim can be interpreted as not just confrontational but the “last straw” in an already difficult relationship which quickly becomes poisonous, turning the parties into sworn enemies bent on destroying each other.

Although litigation may not have such dire consequences, there is always looming the ultimate deadline on the courtroom steps when the procrastination stops, the negotiations conclude, and the court then takes over in steering the parties. If the court takes an aggressive case management approach, the parties lose control over the timing of their negotiations and may find themselves facing an actual hearing. Their conflict is then resolved by a judge or other third party.

Given these negatives, each party is likely to regard litigation as a last resort, to be initiated only when all of the other strategies to remove the negotiation deadlock fail.

While there is no guarantee that the strategies discussed above will work in any particular situation to get disputing parties back to the negotiation table, they are at least worth trying, either alone or in combination, to motivate the parties to try again to find a solution.

But there will be times when the parties cannot find merit in completing their contract or transaction, or in resolving their differences, and it may be better for each of them to recognize their own opportunity costs and pursue other arrangements with the potential for even greater reward. They may have to admit that the time and emotional energy they have spent arguing with each other hasn’t been worth it and decide to just simply move on.

A guarantor of a company’s bank loan may still be liable to pay the full amount of the loan even though the company is not in default in making its loan payments.

The case of Toronto-Dominion Bank v. Konga, 2016 ONCA 976, should remind guarantors that they are liable to pay the full amount of a guaranteed loan upon any default in the terms of the loan, not just a default in the repayment terms.  

In Konga, a director of a company, who was also its majority shareholder and Chief Executive Officer, signed a personal guarantee of all of the company’s obligations to the bank. The bank was providing loans and credit facilities to the company under a loan agreement which linked the credit limit on the company’s line of credit to its accounts receivable up to a limit of $800,000. The company also had to maintain a tangible net worth of $1,250,000 at all times and to provide the bank with certain financial information on a regular basis. The loan agreement was subject to a facility letter which provided that the line of credit would be repayable on demand and that the bank could accelerate the payment of the loan upon the occurrence of any event of default. Events of default included the breach of any term or condition in the loan agreement where the breach was left unremedied for 5 business days.

After the bank issued a notice advising that the company was overdrawn on its line of credit and had been in breach of the tangible net worth requirement, the line of credit remained overdrawn and the company continued to fail to meet its tangible net worth requirement Following several more notices, the bank issued a formal demand for immediate repayment and a notice to enforce the company’s general security agreement, and demanded immediate repayment of the same amount from the director as guarantor. The company filed a notice of intention to make a proposal in bankruptcy. The bank then moved for summary judgment against the guarantor in the Ontario Superior Court of Justice, and the motion judge found that the company was in breach of the loan agreement by (i) being overdrawn on its line of credit; (ii) being in breach of the tangible net worth requirement; and (iii) not providing its accounts receivable listings.

When the guarantor appealed, the Ontario Court of Appeal upheld the motion judge’s interpretation of the guarantee and dismissed the appeal. It rejected the guarantor’s argument that a demand for payment pursuant to the guarantee was only available if the company had failed to make a payment, stating [at para. 20] as follows:

On the findings of the motion judge, the corporation repeatedly failed to meet its financial obligations under the loan agreement and, therefore, had defaulted on its monetary terms. The corporation had failed to stay within its borrowing limits, was repeatedly in excess of its line of credit limit, and was overdrawn every month between January and November of 2014, except for March and April. 

Furthermore, the Court of Appeal stressed [at para. 23] the motion judge’s finding that the guarantee “did not require the respondent [bank] to exhaust its recourse against the corporation, or any other security held by the bank in respect of the corporation’s indebtedness, before being entitled to make a demand under the guarantee”.

In rejecting the guarantor’s argument that the bank’s conduct entitled him to be discharged from his guarantee, the Court of Appeal held [at para. 27] as follows:

To obtain a discharge from the guarantee, the appellant had to establish that the respondent bank’s demand somehow caused the corporation’s default. It is clear on the findings of the motion judge that he did not accept that had occurred. On his findings, the bank played no role in the corporation’s excessive borrowings, its breach of the tangible net worth requirement, its refusal to submit its accounts receivable reports, and its continuing failures to cure its defaults despite the bank’s warnings.

In light of the foregoing, Konga provides a useful reminder that lenders are not necessarily required to exhaust their recourse against the primary debtor before looking to the guarantor when enforcing their loans, and that a guarantor should be prepared for a lender to call on the guarantee as soon as the debtor is in default. However, a guarantor should be aware that a court will consider whether the lender enforcing on the guarantee has caused the default of the debtor, although the guarantor will bear the burden of proving that the lender has acted improperly.

Removing a shareholder from shareholder register and ceasing to pay him dividends held not to be oppression despite lack of proper documentation and failure to comply with CBCA in transferring his shares.

The Supreme Court of Canada case of Mennillo v. Intramodal inc., 2016 SCC 51, provides some comfort to small, closely held companies that their failure to strictly comply with the technical formalities of corporate legislation will not necessarily establish oppression.

In Mennillo, two friends Mario Rosati and Johnny Mennillo created a road transportation company, as Rosati managed the company and Mennillo contributed money. They were the only shareholders and directors, with Rosati holding 51 shares and Mennillo holding 49 shares, although they rarely complied with the requirements of the CBCA and almost never put anything in writing. There was no shareholder agreement nor any written contract relating to Mennillo’s advances of money. When Mennillo later resigned in writing as a director and officer of the company, the company ceased to regard him as a shareholder and transferred his shares to Rosati, even though no share transfer form was signed, nor share certificate endorsed, by Mennillo.

When Mennillo brought an oppression claim against the company, the trial judge dismissed the claim, finding that Mennillo had undertaken to remain a shareholder only so long as he was willing to guarantee the company’s debts but later was no longer willing to do so or to be a shareholder. When the claim was also dismissed on appeal, Mennillo appealed to the Supreme Court of Canada. The Supreme Court held the oppression claim to be groundless, since Mennillo could have no reasonable expectation of being treated as a shareholder given the findings of the trial judge. It stated [at para. 5] that “all the corporation can be accused of is sloppy paperwork … but sloppy paperwork on its own does not constitute oppression”.

The Supreme Court [at para. 10] elaborated as follows:

According to the trial judge’s finding of fact, Mr. Mennillo agreed that he would remain a shareholder of the corporation on the condition that he guarantee its debts. He decided that he no longer wished to guarantee those debts and transferred his shares to Mr. Rosati. He could, therefore, have no reasonable expectation of being treated as a shareholder thereafter. He also could be thought to reasonably expect the corporation to ensure that the corporate formalities to register this arrangement would be observed. But the failure to do so (i.e. the conduct that “violated” those expectations) cannot be characterized as “oppressive, unfairly prejudicial or unfairly disregarding” of his interests. This was a two-person, private company in which the dealings between the parties were marked by extreme informality. As this Court said in BCE [Inc. v. 1976 Debentureholders], “[c]ourts may accord more latitude to the directors of a small, closely held corporation to deviate from the strict formalities than to the directors of a larger public company”. … In substance, Mr. Mennillo was not oppressed but treated as he wanted the corporation to treat him. The failure of the company’s lawyer to comply with the corporate law requirements to give effect to that intention is not oppression.

Although the Supreme Court did not find oppression despite certain corporate formalities being ignored, it did comment on the significance of those formalities. For example, it stated [at para. 63 and 64] that a share transfer cannot be retroactively cancelled by way of simple oral consent, as follows:

As Mr. Mennillo points out, an issuance of shares can be cancelled only if (a) the corporation’s articles are amended or (b) the corporation reaches an agreement to purchase the shares, which requires that the directors pass a resolution, that the shareholder in question gives his or her express consent and that the tests of solvency and liquidity be met. Can such an act by the corporation be valid even though these requirements of the CBCA have not been made? I do not think so. … The commentators agree that meeting the requirements with respect to the maintenance of share capital cannot be optional, given that it is the share capital that is the common pledge of the creditors and is the basis for their acceptance of doing business with the corporation.

Furthermore, the Supreme Court emphasized [at para. 71 to 73] the need for a security to be properly endorsed before its transfer may be registered by the issuing company, even though it declined to provide Mr. Mennillo with a remedy because he knew he had not endorsed his share certificate, as follows:

In this case, the requirements of s. 76(1)(a) [of the] CBCA are not fulfilled. It is common ground that the shares that were transferred were not endorsed by Mr. Mennillo. Therefore it is true that Intramodal proceeded to register a transfer that did not meet all of the criteria stated in the CBCA. But this is of no assistance to Mr. Mennillo under the circumstances. It is not as a result of an improper registration of this share transfer that Mr. Mennillo is no longer the holder of any shares in Intramodal. It is rather as a result of his transfer of these shares to Mr, Rosati, as found by the trial judge. … In that regard, the endorsement of the shares was required to complete the transfer itself between Mr. Mennillo and Mr. Rosati. It was required for the shares to be delivered, which, in turn, was necessary to complete the share transfer: ss. 60(1) and 65(3) [of the] CBCA. Since this was an important formality required by law, it was to be observed on pain of nullity of the transfer … With that being said, there is no doubt about the fact that Mr. Mennillo knew that this formality was not complied with when the company proceeded to register the transfer in the corporate books, some time in 2007. There is also no doubt that he was aware that he had not endorsed his share certificate when the shares were transferred to Mr. Rosati as the trial judge found.

In light of the Mennillo case, a party should not feel allowed to take advantage of mistakes, sloppy paperwork or non-compliance with corporate statutes under the oppression remedy if to do so would provide a benefit that could not reasonably be expected.

Yet non-compliance should not be condoned, and certainly not encouraged. A lesson learned in the Mennillo case is that the uncertainty and confusion resulting from technical non-compliance can result in years of expensive litigation that could be avoided by paying a bit more attention to the paperwork.

Even if a failure to comply with corporate law formalities may not give rise to an oppression remedy, a party may still obtain a remedy by way of pursuing claims for the rectification of records under section 243, or a compliance order under section 247, of the CBCA.