When a family establishes a corporate structure for estate planning purposes, can the reasonable expectations of parents and children change over time? This issue was squarely before the court in Hui v. Hoa, 2015 BCCA 128, where a son appealed a ruling that found his decision to eliminate a monthly income payment to his mother and her right to manage a company was oppressive.
a. Background
The mother and her late husband purchased properties when the son was a child through two holding companies (“Bon” & E&C). They owned all of the voting shares and the son was issued a majority of non-voting shares.
This structure was designed to give the parents control of the properties and income and to facilitate a tax advantageous transfer to the son upon the parents’ death or when they decided to give him control.
There was no expectation that the son would manage or otherwise exercise control of Bon or E&C as a minor. The son did not purchase any Bon or E&C shares and did not make a capital contribution to those companies.
The son was eventually appointed a director of Bon and expressed concern that his mom would leave her assets to her church. In response, the mom cancelled the voting restrictions on his shares but otherwise maintained control and continued receiving monthly income.
The son later requested that the mom relinquish her right to manage and to receive any income from Bon. She refused.
At Bon’s annual general meeting, the son used his voting control to, among other things, eliminate the payment of any compensation to his mom and remove her from management.
b. Chambers Decision
The chambers judge noted that a shareholder’s reasonable expectations should be considered when the shareholder acquires its shares. The chambers judge found that the son had no basis to remove his mom’s right to manage or receive income. The son had no reasonable expectations to manage or control Bon’s affairs without his mother’s consent or until she died.
Those expectations had to be viewed in light of the fact that he had paid nothing for those shares. His only legitimate expectation was to take over the companies on his parent’s death or by consent. The mom’s oppression claim was granted and she her right to manage and receive income was restored.
c. Appeal
The court overturned the decision as the son had not engaged in any oppressive conduct but had merely exercised his rights based on the existing corporate structure. The mom did not have any reasonable expectations to continue receiving income in light of her decision to alter the corporate structure and provide the son with voting control. She could have protected her expectation to a continued income stream through the creation of a trust or a shareholders’ agreement.
The court noted that the oppression remedy “sits uncomfortably in the context of family disputes, where sometimes corporate positions are used as weapons” (at para. 38). However, the focus must remain on the “corporate rights of the parties as stakeholders in the corporation, not as members in a family” (at para. 38).
The focus of the chambers judge on the bona fides of the son’s conduct distorted the analysis of whether he was entitled to do what he did based on his shareholder rights.
The rights of the mom and the son had to be analysed with reference to the existing corporate structure, not that which was originally put in place. Initially, the mom’s expectation of receiving an income stream until her death was reflected in the estate freeze structure. That expectation was changed when the mom transferred control to her son.
The mom did not expect her son to cut off the income stream after making those changes. However, those expectations were not reflected in the revised corporate structure and she did not institute any measures to ensure her expectations where protected. In failing to do so, the mom’s “expectations of continued income from the company were no longer anchored to the corporate structure” and the chambers judge erred in concentrating on the mom’s expectation given the new structure (at para. 53).
The son’s decision to stop his mom’s income payments did not affect her rights as a shareholder. The court noted that this conduct “may very well have been reprehensible in a family context, but this does not translate into corporate oppression” (at para. 52).