Shareholder Remedies



Igor Ellyn and Karine de Champlain

If the rights given to shareholders are to be effective and worthwhile, it is clear that corresponding remedies must be available to the shareholder to cure their breach. 

In the following article, we examine some of the remedies made available to shareholders and their application.

Court Ordered Meetings

The shareholder meeting plays an important role in the successful exercise of voting rights by shareholders.  The corporate statutes provide the Court with discretion to order a shareholder meeting where a meeting is impeded by lack of quorum or other disruptive action by one or a group of shareholders.  

The court may "order a meeting to be called, held and conducted in such manner as the court directs" where it is "impracticable" to call a meeting of shareholders or to conduct a meeting in the manner provided for under the articles and by-laws of the corporation or under statute or "for any other reason the court thinks fit".

In appropriate circumstances, the Court may order a meeting to be "called held and conducted in such manner as the court directs", which provides broad jurisdiction to the court in terms of the types of orders granted under the OBCA.  The legislation also provides for ancillary orders that may be granted in the context of the meeting.  For example, the court may order that the quorum required by the articles of incorporation and by-laws of the corporation or by the statute "be varied or dispensed with" at a meeting ordered pursuant to the Act.

Derivative Action

The powerful but infrequently-used remedy of "derivative action' permits a shareholder or other "complainant" to advance an action on behalf of the corporation when the corporation refuses to bring the action itself. 

The action is available to rectify wrongs done to the corporation itself rather than to the individual shareholder.  The intent of the remedy is to circumvent the problem of management not taking action to rectify a wrong where they may have been involved in or responsible for the wrong sustained by the corporation.

Section 245 of the OBCA defines a "complainant" as:

-          registered holder or beneficial owner, and a former registered holder or beneficial owner, of a security of a corporation or any of its affiliates;

-          a director or an officer or a former director or officer of a corporation or of any of its affiliates; 

-          any other person who, in the discretion of the court, is a proper person to make an application.

A shareholder or complainant with standing may seek to do one of two things: 

-          to "bring an action in the name and on behalf of a corporation or any of its subsidiaries",or

-          to "intervene in an action to which any such body corporate is a party" in order to prosecute, defend or discontinue the action on behalf of the body corporate.

The four statutory pre-conditions necessary to bring a statutory derivative action may be summarized as follows: 

-          the directors of the corporation or its subsidiary will not bring, diligently prosecute or defend or discontinue the action;

-          the complainant has given reasonable notice to the directors of the corporation or its subsidiary of his or her intention to seek leave to commence a derivative action;

-          the complainant is acting in good faith; and  

-          it appears to be in the interests of the corporation or its subsidiary that the action be brought, prosecuted, defended or discontinued.28

It is worth noting that the typical claim to commence a derivative action is when a majority shareholder or senior management has abused his or her power and usurped the right of the corporation. However, the derivative action is not limited to claims against other shareholders or management. 

Court remedies include, but are not limited to some of the following examples:

-          an order authorizing the complainant or any other person to control the conduct of the action; 

-          an order giving directions for the conduct of the action;

-          an order requiring that any amount adjudged payable by the defendant in the action shall be paid, in whole or in part, directly to former and present security holders of the corporation or its subsidiary instead of to the corporation or its subsidiary; and 

-          an order requiring the corporation or its subsidiary to pay reasonable legal fees and any other costs reasonably incurred by the complainant in connection with the action.

The Oppression Remedy

The oppression remedy is widely acknowledged as being one of the most powerful weapons in the arsenal of the shareholder. 

The remedy was introduced largely in response to the difficulties encountered by minority shareholders in a corporate environment that runs by majority rules. Where one group of shareholders abuses their power over another group, inequitable results can occur.

The oppression remedy amounts to this: the Court has a broad remedial authority where it finds conduct that qualifies as oppressive.  It may make any order it thinks fit to rectify the matters complained of. This explicitly includes setting aside a transaction or contract to which the corporation is a party or amending unanimous shareholder agreements, corporate articles or by-laws. This statutory language is to be given a broad interpretation consistent with its remedial purpose.

The great flexibility of the oppression remedy stems from the inclusiveness of its language, which allows any type of corporate activity to be the subject of scrutiny, and which makes the remedy available to a broad class of individuals. 

Importantly, it has been held that no bad faith is required in order to establish conduct as oppressive. It is the effect of the conduct, and not the intention of the party engaging in the conduct, that is of primary importance in oppression remedy cases.

Investigations

The effective exercise of shareholder remedies will frequently depend on possessing the relevant information.  An important statutory aid to shareholders in this respect is the court-ordered investigation of the corporation's affairs where the shareholder can satisfy the court that there are circumstances that warrant the court order.

Unlike many other provisions of the statute, which require the court to be “satisfied”, the court may make the order granting the investigation where it "appears" that the impugned conduct fits into the listed categories.

Appraisal Remedy

An appraisal right is the right of a shareholder to require the company to purchase his shares at an appraised "fair value" under certain circumstances.  There are three circumstances under which the appraisal remedy is triggered under the OBCA:

-          Where shareholders are granted rights of dissent upon certain fundamental changes. These changes include amendments to articles, amalgamations, and sales of all or substantially all of the assets of the corporation;

-           compulsory acquisitions, which arise where a person making a take-over bid purchases 90% or more of the shares of a particular class;64 and

-           Shareholder's right to request acquisition where he holds 10% or less of the outstanding shares of a particular class.

Winding Up

Dissolution of the business is the harshest remedy available to shareholders. 

The OBCA, like other corporate statutes, sets out a number of circumstances under which a court may order a winding-up of the corporation. These include where an oppression remedy  claim has been met, where unanimous shareholder agreements provide the shareholder with rights to make an application and, perhaps most importantly, where it is "just and equitable for some reason, other than the bankruptcy or insolvency of the corporation, that it should be wound up.”

 

Igor Ellyn, QC, CS and Orie Niedzviecki are partners of ELLYN LAW LLP Business Litigation Lawyers, a Toronto law firm specializing in dispute resolution for small and medium businesses and their owners.

Igor Ellyn is a Specialist in Civil Litigation and a past president of the Ontario Bar Association. He has practiced as a business litigation lawyer for more than 30 years. He is a chartered arbitrator and mediator and the author of many legal articles, some of which may be downloaded from the firm’s website. Contact Igor Ellyn by sending an email

Karine de Champlain is a lawyer with Chaitons LLP in Toronto. She has experience in a variety of corporate law matters, including bankruptcy and insolvency, mergers and acquisitions and securities.


Terms & Conditions    Privacy    Copyright© 2014 Internet Brands, Inc. All rights reserved.