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).