What is a disclosable interest and what kind of harm does a shareholder have to suffer in order to bring an oppression claim rather than a derivative action? In Jaguar Financial Corporation v. Alternative Earth Resources Inc., 2016 BCCA 193, the Court of Appeal clarified the law on disclosable interests and examined the sometimes blurry line between oppression and derivative claims.
Two petitions were under appeal. The hearing judge concluded that the appellant company had acted oppressively against the respondent shareholder. Petition #1 concluded that a proposed merger (to be completed without shareholder approval) was unfair and prejudicial to shareholders on account of, among other things, that the directors had a disclosable interest in the transaction and shareholder approval was required since it would change the appellant company’s objectives. The judge prohibited the merger from completing (pursuant to s. 150 of the Business Corporations Act, S.B.C. 2002, c. 57 (“BCA”)) until shareholder approval was obtained at the next AGM.
Petition #2 centred around the company’s purported failure to abide by orders in the first petition and a proxy fight resulting from the shareholder’s attempts to replace the incumbent directors. The company retained a proxy advisor and established a special committee. The shareholder alleged that the company acted oppressively during this process through, among other things, excessive spending, disregarding orders from Petition #1 and issuing misleading communications. The judge agreed and, again, held that the company had acted oppressively and made various orders enjoining the company from certain actions.
At issue in both petitions was whether the shareholder’s interests were uniquely impacted from that of other shareholders or whether the matter was more appropriately brought as a derivative action on behalf of the company.
The Court of Appeal overturned both judgments. On Petition #1, the Court of Appeal concluded the directors (except one that did disclose his special remuneration) did not have a disclosable interest pursuant to s. 147(4) of the BCA simply because they would be continuing as directors in the new company. A transaction does not create a disclosable interest “merely because” it includes a provision regarding the remuneration of a director or officer – something more is required, such as excessive remuneration. There was no evidence the fees or benefits under the transaction would be excessive.
The court then proceeded to examine the findings of oppression made by the hearings judge on the basis of four shareholder expectations that had been breached. The court went through each of those expectations, involving dilution, disclosure, change of business objectives and conduct of the AGM, and overturned the findings that the shareholder held reasonable expectations on any of these matters.
On Petition #2, a number of the issues were addressed given the Court of Appeal’s finding in the first petition. One of the central issues was whether the shareholder should have initiated a derivative action since the harm complained of was suffered by all shareholders.
The Court concluded that a derivative action was the appropriate vehicle and held that a shareholder must show it suffered harm separate and distinct from the harm suffered by all shareholders in order to proceed with an oppression claim. The shareholder does not have to be the only shareholder that suffered harm to claim oppression, however “it must show peculiar prejudice distinct from the alleged harm suffered by all shareholders indirectly”.
The Court’s conclusion reaffirmed the rule of Foss v. Harbottle and outlined that oppression will not be available where a claimant does not suffer a separate or unique harm from that of all shareholders.