Directors held in contempt of court

It is relatively rare for British Columbia courts to hold directors or officers of a company in contempt for sins of the company. In Axion Ventures Inc. v. Bonner, 2023 BCSC 213, the BC Supreme Court did just that, holding a company’s directors in contempt for failing to abide by a court order.

The order that the defendants were accused of breaching required the defendants to place any company shares they held (it was not clear if the directors personally held shares) or controlled in trust, pending the results of the litigation. The defendants failed to do so, claiming that compliance with the order would put them in breach of their contractual obligations with their U.S. lender.  

The three-part test for civil contempt is: (a) the order alleged to have been breached must state clearly and unequivocally what should and should not be done; (b) the alleged breaching party must have had actual knowledge of the order, and (c) the party allegedly in breach must have intentionally done the act that the order prohibits or intentionally failed to do what the order compels.

The standard of proof for contempt is high and all three elements must be proven beyond a reasonable doubt and not a balance of probabilities.

The court determined Rule 22-8(2) allows for the enforcement of its order against any directors and officers found to be willfully disobeying that order. Directors and officers have a duty to do everything that is reasonable to ensure that company’s compliance with a court order. The intentions of a director or officer who is a directing mind may be considered when determining whether the company had the requisite mens rea to willfully disobey a court order.

While the court agreed that contempt of court is a “heavy, blunt tool” and should be a “last resort to obtaining compliance,” it nevertheless held the defendants in contempt. The court found that the defendants could not prove that compliance with the order would result in a breach. At best, the defendants could prove that compliance with the order may put its parent company in breach of its contractual obligations. 

While penalties for civil contempt are typically proportionate and are generally imposed with a view to enforcing compliance, jail time is an option. This decision is a powerful reminder of the risks that directors or officers could face if they fail to take all reasonable steps to ensure corporate compliance with court orders.

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. 

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.