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.