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.

Can a court order the sale of a company's principal asset in a derivative action to break corporate deadlock?

In a derivative action, can the court order the sale of a company's principal asset pursuant to s. 324 of the Business Corporations Act?

The BCSC concluded it could not in Phoenix Homes Limited v. Takhar, 2017 BCSC 699.  In the face of a corporate deadlock, a company's principal asset could only sold pursuant to the terms of s. 324 of the BCA, which did not apply to a derivative proceeding. 

Phoenix Homes was owned by two shareholders and was deadlocked.  One of the shareholders obtained leave to commence a derivative action in the name of the company against the other for misappropriation of business opportunities.

The petitioner applied to have the court sell the company's principal asset.  The petitioner alleged the respondent had caused the company to enter into a sale agreement with a third party for that project at less than fair market value.  The petitioner wanted the court to order the sale of the land to take advantage of current real estate conditions.  The third party had filed a claim seeking specific performance of the agreement. 

The petitioner argued that the court could order a sale despite the action for specific performance on the basis that the third party action had little prospect of success.  The issue with this argument was that the court, acting pursuant to Rule 13-5, did not have discretion to make, in effect, a final decision on the merits of the specific performance claim at this stage. 

The court held that an application pursuant to s. 324 would only be available in a liquidation or dissolution of the company after the derivative proceeding.  Aside from a liquidation or dissolution, s. 324 was only available in an oppression proceeding.  The petitioner shareholder's oppression claim had already been dismissed by a prior decision.

Is it an oppression claim or a derivative action?

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. 

Latest word from Supreme Court of Canada on oppression

Does the failure of a company to follow the legal formalities in the Canada Business Corporations Act, R.S.C. 1985 c. C-44 (“CBCA”) constitute oppression?  The Supreme Court of Canada revisited the oppression remedy and concluded that it did not.

In Mennillo v. Intramodal Inc., 2016 SCC 51, the majority of the court outlined that the failure to follow certain formal requirements of the CBCA did not amount to oppression.  The petitioner, one of two shareholders in the respondent, claimed he was oppressed as he was frozen out of equity participation in the respondent. 

The trial judge concluded that the petitioner had agreed to remain a shareholder in the respondent so long as he guaranteed the respondent’s debts.  The petitioner subsequently decided to stop guaranteeing the debts, resigned as a director and agreed to transfer his shares to the respondent’s controlling shareholder.  Through an oversight of that shareholder’s lawyer, the appropriate paperwork was not completed to transfer the shares.

The affairs of the respondent company were “marked by extreme informality”.  The transfer of the petitioner’s shares was not completed in accordance with the express requirements of the CBCA, including the endorsement of the petitioner on his share certificate. 

However, even though those formalities were not complied with, the court found the petitioner had no reasonable expectation of being treated as a shareholder after agreeing to transfer his shares.  The respondent’s failure to complete the “corporate formalities” did not constitute oppression and did not “strip” the petitioner of his status as a shareholder. 

The decision reflected the equitable nature of the oppression remedy and that cases ought to be judged on the basis of business realities and not technicalities.  However, the majority did not state that non-compliance with corporate legislation will never lead to an oppression remedy.  A larger company, particularly one that is widely-traded, would likely be held to a higher standard with respect to adhering to corporate formalities than the company at issue in these proceedings. 

Derivative Actions: Best Interests of the Company

When is it in the best interests of a company to sue its directors and officers for improper disclosure?  This was the central issue in Arkansas Teacher Retirement System v. Lions Gate Entertainment Corp., 2016 BCSC 432, which dealt with an application for conduct of a derivative action. 

The petitioner was a shareholder in the respondent company and applied to bring a derivative action against various directors and officers of the respondent stemming from events in 2010 which were the subject of proceedings before the BC Supreme Court and Court of Appeal regarding a takeover bid launched by Carl Icahn.

The central argument of the petitioners was that the proposed defendants authorized, permitted or acquiesced in filings of US Securities Exchange Commission (“SEC”) mandatory disclosure documents that misrepresented and omitted material facts.  On account of those filings, the company paid a USD$7.5 million fine.  Through these actions, the petitioners argued the proposed defendants breached a number of equitable and legal duties to the company.  The petitioners argued that the company suffered damages, including the amount of the fine and the “credit, character and reputation” of the company. 

The company formed a special committee to review the proposed derivative action and concluded it would be harmful to the company and not in its best interests.

The company’s central argument was that the proposed action was not in the best interests of the corporation.  The costs of a derivative action had to justify the potential outcome to be granted leave.  The costs had to balance the potential recovery of damages (predominantly comprising the $7.5 million fine) and the legal fees incurred to defend the action (there were 12 proposed defendants, each of whom would be entitled to separate counsel). 

The focus of the court’s analysis was based on whether the proposed action was in the best interests of the company.   

Best Interests

The court’s analysis of best interests focussed on the following issues: (1) the company’s indemnification obligations; (2) reasonable prospects of success of the case; (3) amount of the SEC fine; (4) business judgment rule; and (5) independence of the special committee.

As a general principle, the potential benefits of starting a derivative action had to justify the cost of the litigation and the inconvenience to the company, in addition to demonstrating that a reasonable claim existed with an evidentiary foundation.  The financial well-being of the company is an important consideration in determining its best interests.

Indemnification

The rules under the BCA as to whether directors and officers are entitled to indemnification for a derivative action are “unclear and have not been extensively litigated”. 

The respondent argued that the directors and officers were entitled to indemnification against any damages and for legal fees pursuant to the company’s articles and contracts that had been executed by the company and directors and officers.  There was no evidence that any of their actions were done in bad faith.  A derivative action would be futile since the company would be required to indemnify the proposed defendants for any damages. 

The court outlined that the provisions of the BCA were unclear as to whether indemnification is permitted for derivative actions.  The court noted that s. 163(2) “appears” to prohibit indemnification in the context of a derivative action, but has not yet been judicially considered.  However, there is a conflict in the BCA as s. 164 provides that despite other provisions of the BCA a court can order indemnification for costs or liabilities.    

The court noted the policy objectives behind s. 163(2) as the “remedy of a derivative action would be futile if directors could breach their fiduciary duty, but be indemnified by the company when the company is awarded a judgment against them”.  However, the ambiguity arising between s. 163(2) and 164 made it “impossible to discern in what situations indemnification may be given, if any”.

While the court declined to make a decision as to whether indemnification was available he stated that it was “impossible to predict how s. 164 should operate at this time”.  The court went on to state “I do not believe that s. 164 should be used to supplement the poorly drafted s. 163.”

Reasonable Prospect of Success

The court found the petitioner’s claims had no reasonable prospect of success.  First, the disclosure issues had already been litigated and resolved before the Court of Appeal.  Second, none of the proposed defendants had been investigated by the SEC for any wrongdoing.  The fine at issue was levied against the company only.  Third, there were no facts pleaded to establish a breach of a fiduciary duty. 

Amount of SEC Fine

A lawsuit regarding the imposition of the SEC fine could not be in the best interests of the company given that it was a relatively small amount of money.  The harm of a derivative action to the company would not be worth the damages sought.

Business Judgment Rule

The court decided that the business judgment rule does not apply to all actions of the board.  For example, the board could not rely on the business judgment rule in its failure to meet its disclosure requirements, if a court ruled that the board had breached its duty of care.  Nevertheless, the court did accord deference to the special committee’s decision not to pursue the derivative action.

Independence of the Special Committee

The court rejected the petitioner’s argument that the special committee had to establish its independence and that it acted in good faith.  There was a presumption of good faith which had to be rebutted, which the petitioner was unable to do.   

Finally, the court noted that the commencement of a derivative action would constitute a breach of the settlement agreement that the company had entered into with the SEC.  The company was prohibited pursuant to that agreement from seeking to recover the fine paid to the SEC.  If the derivative action was authorized, the SEC would be permitted to re-investigate the case. 

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.

Family dispute or oppression dispute?

Is the oppression remedy available where the issues are the subject of a family law dispute?  In Ludwig v. Buzz Berry Production II Inc., 2016 BCSC 746, the court confirmed that the oppression remedy in the BCA is not available where the issues are the subject of a family law or personal dispute.

The plaintiff and the personal respondent were husband and wife and were the sole directors of the respondent company.  They owned 49% and 51% of the shares, respectively. The plaintiff brought an oppression action to compel the respondents to take certain steps in respect of banking and corporate records, among other things.

The parties were separated at the time of the petition. They participated in several television series projects together, through single-purpose companies. They entered in to a separation agreement that generally provided for a 49/51 split of any proceeds from two earlier projects for which the single-purpose companies had already been dissolved, despite the fact that the plaintiff was not a shareholder of the first company. 

One of the issues addressed by the court was the plaintiff’s request that a personal hard drive as well as external hard drives related to the various television productions be produced for review and copying, and further that the petitioner be provided access to certain documents. The respondents agreed to provide access to the hard drives and documents for copying at the petitioner’s expense.

As a result, the only evidence of oppression was the insistence that the petitioner bear her own costs for copying. The court decided the issues in the case were not related to the operation of the corporate respondent nor was the personal respondent using his powers as director to prejudice the minority shareholder. The court explained:

This is not a situation such as that discussed in Hui v. Hoa, 2015 BCCA 128, where the reasonably expectation of stakeholders in a corporation may be at risk of being prejudiced by analysing their rights through the lens of a family law dispute.

The court held that the oppression remedy is only available to address oppressive conduct in the person’s capacity as a shareholder, director, officer, even though the person may have other interests that are intimately connected to a transaction.  The court decided that the petitioner’s interests in the records of the dissolved corporations, as well as any interest in her personal hard drive, did not derive from her status as shareholder of the corporate respondent and so the oppression remedy was not available in the circumstances.

When will a court step in to break a corporate deadlock?

When is it just and equitable to liquidate and wind up a company by reason of director deadlock? The BC Supreme Court recently canvassed this issue in Kidner Investments Ltd. v. Totem Mercury Holdings Ltd. et al., 2017 BCSC 205. The court concluded that the directors and shareholders of the closely-held company could no longer work together and, without court intervention, the ongoing management of the company would be deadlocked which would not be in the best interests of the company. 

Background

The respondent company was owned equally by two companies, based on a structure set up in 1973 by two friends. The original owners died and their respective interests were left to their children. The company owned a large parcel of land near Cambie Street and Marine Drive, which had been leased since 1973 to car dealerships. The current lease expired in November 2017. 

The petitioner wanted to sell the land to take advantage of rising property values; the other director wanted to continue leasing the property to receive a regular income stream.   Over the course of 18 months, the land had risen in value from $12 to $25 million. The company had received a number of offers to purchase. 

The petitioner sought declarations that the directors were at a deadlock or, alternatively, that the affairs of the company, or powers of the respondent director, were being exercised in an oppressive manner. As for relief, it sought dissolution and liquidation of the Company or in the alternative that the respondent director be required to sell its shares to the petitioner.

Disagreements between directors

The evidence demonstrated significant disagreement between the directors which ultimately lead to corporate deadlock regarding the future direction of the company and its plans for the land.

The articles of the company did not provide assistance on this issue but only required a selling shareholder to first give the other shareholder a 30-day opportunity to purchase the shares before the shares could be sold to a third party.

The petitioner sought to engage in a process to determine the value of land for its eventual sale. The respondent refused the petitioner’s request to obtain an appraisal of the land. Similarly, the respondent refused to respond to any offers to purchase and expressions of interest the company received for the property.

The respondent argued the intentions of their fathers was to hold the land in perpetuity so that their children could have a regular income stream. While agreeing that the parties were at an impasse, the respondent’s principal argument rested on the fact that it would have to pay taxes upon the sale of the land and could incur unquantified “damages” on the sale. 

Rudderless Company

The court found that the relationship between directors had deteriorated and they were deadlocked in their future ability to make decisions necessary for the ongoing operations of the company. There was no need to make findings as to how or why the deadlock had arisen or to assess blame for it. The issue was determining the fairest or most efficient way to disentangle the parties.

Without court intervention, the ongoing management and operation will be “rudderless and deadlocked” and something had to be done in order to avoid an inevitable adverse outcome for the company.

The court rejected the respondent’s proposition that the status quo was in the company’s best interests. The lease expired in November 2017, there was no guarantee the current tenant would remain in an overholding lease and the petitioner was refusing to agree to a new lease. Further, the payment of taxes was not a basis to oppose the sale; taxes were not “damages”. There was no evidence that the sale would be improvident at this time. 

The court outlined that it would not use its equitable powers to enforce legal rights where the evidence showed a ready market for the sale of shares of a dissatisfied shareholder. Here, there was no market as no third-party purchaser would pay for a non-majority position in a deadlocked company without a significant discount. 

Since there was no ready market for sale of petitioner’s shares, the parties’ legal rights could be subject to an application of equitable powers. The court ordered that the land be marketed for sale. The court permitted each shareholder to have a right of first refusal to purchase the land or to purchase the others shares based on the value to be received from the sale. 

Director's Actions Oppressive

While not needing to decide the issue, the court concluded that the respondent director had acted in an oppressive manner by blocking attempts to obtain a land appraisal and preventing the company from responding to offers to purchase. 

The petitioner had a reasonable expectation that it could sell the land to enjoy benefits and legacy left by the shareholders’ father.  There was no evidence that the land would be held in perpetuity. In fact, the evidence demonstrated factors indicating its possible disposition over the years. Despite the fact that the land had been leased since 1973, this did not mean that it would not be in the best interests of the company to sell the land in the future. Practices and expectations can change over time. 

Murky line between oppression and derivative actions

Has the “somewhat murky” line between the oppression remedy and the derivative action all but disappeared and should they be considered as one combined remedial device?  In Rea v. Wildeboer, 2015 ONCA 373, the Ontario Court of Appeal confirmed that there remains a bright line between the two types of actions and, while the two are not mutually exclusive, they have different legal foundations and purposes. 

The appellants were minority shareholders in a publicly-traded company and claimed that certain individual respondents breached their fiduciary duties and misappropriated corporate funds.  It was alleged that the respondents had caused the company to enter into non-market transactions on terms which personally benefitted them and were unfair to the company.  The appellants alleged that the acts constituted oppression and sought to leave to commence a derivative action against certain directors.

The respondents brought a motion to strike the oppression claims on the basis that any claims, if they existed, were only derivative in nature.  The chambers judge struck the oppression claims which was upheld by the Ontario Court of Appeal. 

The court confirmed the distinct purposes served by both proceedings, which were designed to counteract the impact of the rule in Foss v. Harbottle.  Legislation created two remedies with different rationales and separate statutory foundations: a corporate remedy and an individual remedy.

A derivative action is a minority shareholder’s “sword” to the protections offered by the corporate shield and majority rule.  The oppression action is designed to protect the individual interests of a “complainant” as a result of how the company’s affairs have been conducted. 

There are cases in which claims may overlap between the two actions, mostly involving small, closely-held corporations, where wrongs to the corporation could also have direct effects on a complaints.  However, the court held that the distinction between the two actions ought to be maintained, particularly given the important policy purpose served by the leave requirement for derivative actions.

The appellant argued that the distinction between a derivative and an oppression proceeding had been significantly moderated such that a complainant was be entitled to pursue an oppression remedy even where the wrong was to the company provided the shareholder’s reasonable expectations have been violated by conduct caught by oppression. 

However, to establish oppression there must be conduct that harms the complainant personally, not only the collectivity of shareholders as a whole.  The oppression remedy cannot be invoked where a reasonable expectation is alleged but does not establish that it was oppressive to the interests of the complainant in its personal capacity.  

The pleading only contained “bald claims” to support argument that there was harm to individual interests qua shareholder.  The allegations did not establish any harm to the appellants that was different than the harm suffered collectively by all shareholders. At the heart of the claims was an allegation of misappropriation of corporate property.  The substantive remedy claimed was the disgorgement of the ill-gotten gains back to the company.  In order words, the alleged losses were suffered by all shareholders and not any one shareholder in particular.  The appellants were required to pursue the claim by way of derivative action.

Family disputes within the corporation

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).