Personal Liability for Oppression: Court Offers Guidance to Corporate Leaders
Published:
July 17, 2017
Author(s):
A corporation does not always sail in calm or safe waters. Cash shortages, unattainable or unmet goals, Board disagreements over the best course of action, self-interest and the tempting opportunity to neutralize a boardroom foe, can all make for difficult and dangerous decisions. Decisions made in such circumstances can lead to significant disputes amongst company stakeholders, majority and minority factions, or creditors and management. Disaffected stakeholders may see the legal remedy of “oppression” as a pathway to personal redemption or financial relief. The stakeholder can ask a court to reverse decisions or make other orders impacting the company; it can also ask a court to order that a director personally compensate the stakeholder.
The threat of personal liability can chill and deter corporate leaders from making the sorts of decisions the company needs. On July 13, 2017, the Supreme Court of Canada clarified – and restricted – the law and provided better-defined boundaries for personal liability of directors for oppression. In Wilson v. Alharayeri, the Court confirmed that merely adopting a lead role on the board “can never suffice to ground a director’s personal liability”. Personal liability for oppression will be imposed only where it is “fit in all the circumstances” based on a set of newly-articulated criteria. The decision gives corporate leaders some comfort that, within limits, they will not be held personally liable for taking bold action in the company’s best interests.
The Oppression Remedy. The “oppression remedy” is a legislated remedy under provincial corporations legislation and under the Canada Business Corporations Act (CBCA). Generally speaking, it provides a means by which corporate stakeholders can ensure they are treated fairly. A “complainant” in an oppression proceeding can be a shareholder, a director, an officer, a creditor, or any other person who the court considers to be “a proper person” to make an oppression application. The complainant can ask the court to order pretty much any remedy that will address the alleged unfair treatment. Cases and outcomes are very specific to their facts and the courts look at business reality, not just narrow legality. The complainant must satisfy two key requirements: identify their reasonable expectations, and satisfy the court that such expectations were violated by corporate conduct that was oppressive or unfairly prejudicial to, or that unfairly disregarded, the complainant’s interests.
Personal Liability of Corporate Directors for Oppression. It has generally been accepted that courts can impose personal liability for oppression on corporate directors. Wilson v. Alharayeri provides some clarity around when that personal liability can be imposed. Although this decision is in the context of a CBCA company, it will undoubtedly be applied to provincially-incorporated companies since every province has a similarly-worded oppression remedy provision in its corporations legislation.
In Wilson v. Alharayeri, a Quebec-based technology start-up company was attempting to develop a new product. Mr. Alharayeri and Mr. Wilson (amongst others) were principals of the company. The company was short of cash due to slack sales and capital investment that had fallen short of goals. To remedy the situation, after an attempted merger failed, the board voted to proceed with a private placement of convertible debt. But first, the board accelerated the conversion of some of Mr. Wilson’s preferred shares into common shares, allowing him to participate in the private placement. The board majority, displeased with Mr. Alharayeri’s recent conduct, did not do the same for Mr. Alharayeri’s preferred shares. Further vexing Mr. Alharayeri, he was personally strapped for cash and could not participate in the private placement without such a conversion. When the financing closed, Mr. Alharayeri’s proportion of common shares was substantially reduced. Mr. Alharayeri sued for oppression, seeking (amongst other remedies) compensation from Mr. Wilson personally. The Quebec Superior Court decided that Mr. Wilson was personally liable. Mr. Wilson appealed to the Quebec Court of Appeal, which dismissed the appeal. Mr. Wilson appealed further to the Supreme Court of Canada, but lost again. The Court ruled in Mr. Alharayeri’s favour, but also recognized that additional guidance was warranted respecting when personal liability of directors was “fit in all the circumstances” in an oppression case, and articulated “four general principles”:
- Fairness. Personal liability may attach where a director orchestrates a corporate decision that personally benefits the director (either monetarily, or in terms of degree of control over the company) and the decision is detrimental to the complainant. Personal liability is appropriate because the company should not bear the cost of compensating the complainant where another director has received an unfair personal benefit due to the oppressive conduct.
- Extent of Relief. Any imposition of personal liability should be limited to what is “necessary to rectify the oppression”.
- Reasonable Expectations. A remedy should aim to protect only the complainant’s “reasonable expectations”. A threat of personal liability should not be used in a tactical manner to seek to obtain a better remedy than what is available to other similarly-situated stakeholders.
- Alternative Remedies. Before imposing personal liability on directors, a court should consider the availability of other forms of legal relief.
Please contact your McInnes Cooper lawyer or any member of the Corporate Governance & Compliance Team @ McInnes Cooper to discuss this topic or any other legal issue.
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