When will excessive compensation constitute oppression?

When can the payment of management fees become oppressive?  In 1043325 Ontario Ltd. v. CSA Building Sciences Western Ltd., 2016 BCCA 258, the court concluded one director had authorized excessive compensation and ordered repayment based on expert evidence.

The trial judge found the majority shareholder concealed financial information and forged the signature of the minority shareholder on resolutions and waivers regarding audits and finances.  The court found the majority shareholder engaged in oppressive behaviour and ordered a buy-out of the minority shareholder.

The minority shareholder appealed on a number of grounds, including that the majority shareholder had paid himself excessive management fees.  The minority shareholder argued that the quantum of those fees either ought to be used in calculating the value of the shares or be paid out as damages, both of which the trial judge rejected.  The Court of Appeal analysed whether the payment of excessive management fees was properly framed as a personal action or as a wrong to the company. The court confirmed that a claimant must show "particular prejudice or damage" beyond a reduction in share value to succeed in oppression.

The court held that the payment of excessive fees in a closely-held company could constitute oppression.  The court found the payment of those fees was oppressive on the basis that the majority shareholder had treated the company as if it was his own and had engaged in deliberate conduct to conceal financial information.  Further, a derivative action would be counterproductive since it was a two-member company and would simply result in the return of fees to the company, which was controlled by the majority shareholder.

Based on expert evidence adduced at trial, the court set the fair compensation for services and ordered a pay-out of the excessive amounts in proportion to the minority shareholder’s interest in the company.