COVID-19 + Alberta Corporations: Shareholder Disputes, Oppression and Remedies
September 2021 - 5 min read
The world has changed. The COVID-19 virus is impacting everything and everyone, and certainly, only the most fortunate of businesses have not been adversely impacted. As waves of the virus have strained our healthcare system, it has also caused significant economic contraction and uncertainty. This difficult landscape may pave the way for an increase in corporate, director and shareholder disputes, particularly in Alberta.
Given the economic climate over the last 16 months, corporations have been faced with the difficult decision to alter their business practices to remain afloat. Significant strategic decisions may contradict the reasonable expectations of a company’s shareholder(s). A shareholder may seek Court intervention where a decision oppresses, is unfairly prejudicial, or unfairly disregards those reasonable expectations.
In Alberta, business corporations are governed by the Business Corporations Act and/or the Canada Business Corporations Act (depending on whether they are federally or provincially incorporated). Both pieces of legislation impose a responsibility on corporations to consider the interests of shareholders and other relevant corporate stakeholders. Both pieces of legislation also recognize a broad range of corporate misconduct and provide for certain equitable remedies intended to provide redress for such conduct, such as oppression.
The Oppression Remedy
The oppression remedy protects stakeholders from certain acts by a corporation. The remedy is available to a wide range of stakeholders, including security holders and shareholders, creditors, directors, and officers. The actions of a corporation, its affiliates, or its directors may give rise to an oppression claim in response to the oppressive or unfairly prejudicial conduct.
In order to determine whether oppression exists, the subjective expectations of the stakeholder must be ascertained, generally based on the corporation’s purpose, conduct, representations and/or public statements. Next, the analysis turns to whether those expectations were objectively reasonable. The conduct of directors, committees, and officers, and whether or not they received independent legal or financial advice, are relevant factors in determining whether they acted fairly. Proof of bad faith on the part of directors is unnecessary if the foreseeable result of their actions is that such would be oppressive to a minority of shareholders.
If oppression can be made out, the next consideration is the form of relief being sought. One of the most significant aspects of the oppression remedy is the extremely broad and flexible forms of relief available to successful claimants. Examples of statutory remedies include but are not limited to:
- an order restraining the conduct complained of;
- an order removing the directors;
- a compensation order;
- proprietary remedies; and
- orders against directors personally, including awards of legal and other costs.
In times like these, where many businesses are experiencing financial strain, it is not uncommon for shareholders’ interests to conflict. Corporations must attempt to balance these competing interests. In seeking such balance, corporations must, at a minimum, acknowledge that every shareholder has a legitimate and reasonable expectation to be treated fairly. That said, not all shareholder grievances will meet the requisite threshold for oppression unless caused by oppressive or unfair conduct and actually resulting in loss or damage.
Claims Against Directors and Officers
If a corporation engages in oppressive or unfair conduct, claims can be brought against the corporation’s directors and/or officers. Directors and officers have a duty to exercise the care, diligence, and skill of a reasonably prudent individual. They also have a fiduciary duty to act honestly and in good faith, with a view towards the best interests of the corporation.
Directors may be found personally liable for certain liabilities of the corporation, particularly if they fail to fulfil their fiduciary duties. Corporate oppression involves situations in which the directors (and by extension the corporation) exercise or threaten to exercise their powers in a manner “that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer”.
First, the oppressive conduct must be properly attributable to the director because he or she is implicated in the oppression (e.g., the director must have exercised or failed to exercise his or her powers so as to affect the oppressive conduct); and secondly, the imposition of personal liability must be a fit remedy in all the circumstances.
The “business judgment rule” will often protect a director from challenges to whether they exercised the appropriate care and diligence in making certain decisions. It may be that a decision of the directors or of the corporation has in fact disregarded the interests of minority shareholders, but is nonetheless saved because it was made in good faith, after appropriate due diligence, and was objectively in the best interests of the corporation.
Remedies for Oppression
In Wilson v Alharayeri, 2017 SCC 39 the Supreme Court provided the following four principles that should guide a court in determining what is a “fit” remedy:
- The oppression remedy must in itself be a fair and fit way of dealing with the situation:
- There are five situations in which personal orders against directors might be appropriate: (1) where directors obtain a personal financial benefit from their conduct; (2) where directors have increased their control of the corporation by the oppressive conduct; (3) where directors have breached a personal duty as directors; (4) where directors have misused a corporate power; and (5) where a remedy against the corporation would prejudice other security holders;
- The presence of a personal benefit and bad faith remain hallmarks of conduct attracting personal liability, but like the other indicia, they do not constitute necessary conditions; and
- Fairness requires an assessment on a case-by-case basis, having regard to the circumstances. For example, 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.
- The order should go no further than necessary to rectify the oppression.
- The order may serve only to vindicate the reasonable expectations of security holders, creditors, directors, or officers in their capacity as corporate stakeholders.
- The Court should consider the general corporate law context in exercising its remedial discretion under the legislation. Director liability cannot be a surrogate for other forms of statutory or common law remedies, particularly where such other relief may be more fitting under the circumstances.
The COVID-19 global pandemic crisis poses particular challenges for directors and corporations around the world and right here in Alberta. Contingency plans should be made to help corporations respond to unpredictable public health directives, and directors must be ready and willing to implement new and dynamic backup plans to help their corporations survive. Inevitably they will be required to make many tough decisions while facing the economic hardships caused by COVID-19.
Directors should ensure that they are actively attempting to balance the competing interests of the various stakeholders who will be impacted by their critical decisions. To help reduce the risk of oppression claims, directors should be as transparent and open as possible. Decisions that may, by necessity, disregard the interests of a shareholder or group of shareholders should be well-documented and reflect the directors applying their minds and exercising their business judgement with a view to serving the interests of the corporation as a whole.
If you have any questions or need help with corporate, director and/or shareholder disputes, contact a lawyer from Field Law's Litigation Group.