Can the dilution of a shareholder’s interest be the basis for an oppression claim?

In a decision of the British Columbia Supreme Court released last week, the Court reiterated that in a claim for oppression, a court must consider the reasonable expectations of the claimant and whether the claimant has proved those expectations were breached in an oppressive manner.  While a dilution could be the basis for oppressive conduct, the facts did not bear out in this case.

The petitioners became shareholders of the respondent, Eco Oro Minerals Corp., in November 2016. Three months later, they called a shareholders’ meeting with the purpose of replacing the board. The board set the meeting for April 24 and selected March 24 as the record date, being the date by which a shareholder must hold shares in order to be eligible to vote. On March 16, the board issued shares to other corporate and individual respondents by way of debt conversions.

The petitioners argued that the purpose of the March 16 share issuance was to secure sufficient “friendly” voting power and had the effect of diluting their shares. They argued that the issuance of shares was self-serving and restrictive of their voting rights, and on that basis, sought an order that such issuance was oppressive and should be set aside. They argued that they had a reasonable expectation that their share position would not be diluted.

The court rooted its analysis based on an examination of whether the board’s actions were in the best interests of the company, while giving deference to board decisions pursuant to the business judgment rule.  In analysing the best interests of the company, the court looked to transactions of the company that occurred prior to the petitioners becoming shareholders to provide context to the board decisions to convert the respondents’ debt.

As of 2015, the company’s main asset was a gold/silver mining project in Colombia. By February 2016, the mining project was no longer financially viable, on account of steps taken by the Colombian government. It initiated an arbitration against Colombia and so its main asset became the arbitration claim. It was in “desperate financial straits”, requiring significant funds to continue to pursue its arbitration with the government of Colombia. Between July and September 2016, three of the respondents injected significant capital in exchange for, among other things, unsecured convertible notes.

The Court held on the evidence that despite the timing, the primary purpose of the debt conversion was debt reduction. It held that it was always the company’s intention that the respondents be equity participants and it was reasonable that the conversion occur prior to the record date in order that they may participate in the election of the board. There was no evidence that the conversion was not in the best interests of the company, and the conversion was permitted by the investment agreements of which the petitioners had full knowledge when purchasing their shares. Finally, the Court noted that the petitioners are “sophisticated investors and invested in Eco with their eyes open…”.

This case confirms prior decisions that a board can dilute a shareholders’ interest where the steps taken are in the best interests of the company. The risk of dilution highlights the importance of considering your rights as a shareholder (particularly whether you have pre-emptive rights to preserve your pro-rata share ownership) when purchasing shares in order to avoid the potential of dilution.