Business Judgment and the Fair Treatment of Shareholders
A corporation may conduct its business affairs as it sees fit. Directors (and officers through delegation) do not have to make perfect decisions, but they need to act in the best interest of the corporation. So long as decisions are made honestly, diligently and reasonably, a Court will not substitute its own opinion for that of the board as doing so would run contrary to free enterprise. That said, in conducting business, the corporation must have regard to reasonable expectations of shareholders and must not single out a shareholder by treating him or her unfairly or in a harsh manner. Alberta’s Business Corporations Act (“BCA”) provides remedies to a shareholder in instances where that shareholder suffers a loss as a result of unfairness or harsh treatment. The common term used to describe a lawsuit claiming damages for such treatment is the “oppression action”, which has been described by the Courts as “extraordinary”.
The oppression action differs from the “derivative action” by which a shareholder obtains permission from the Court to sue a party on behalf and in the name of the corporation. In an oppression action, a shareholder seeks damages as a result of being singled out for ill treatment. In a derivative action, however, the corporation (at the behest and under the direction of the shareholder) sues a party or even directors for losses suffered by the corporation (that is, shareholders generally).
When faced with an oppression action, the Court has authority under the BCA to restrain the conduct complained of, vary or set aside a transaction or contract, compensate an aggrieved shareholder or even liquidate and dissolve the corporation. However, it does not do so lightly. As noted, Courts do not second-guess reasonable corporate decisions. The key question is whether the shareholder suffered a compensable loss arising from the corporation’s violation of the shareholder’s reasonable expectations. A Court takes into account a number of factors such as general commercial practice, the nature of the corporation, the relationship between the parties, past practice, representations and agreements when determining whether a reasonable expectation exists.
In the recent Shefsky v. California Gold Mining Inc. (“Shefsky”) case, the Court of Appeal determined whether a shareholder suffered losses in the oppression case before it. As a shareholder with a minority stake in the defendant corporation, the plaintiff advanced his main claim that the corporation oppressed him or otherwise disregarded his reasonable expectations by issuing shares to a group of investors without giving him an opportunity to buy some or all of those shares. He argued that the issuance of shares “below market value” was done in order to dilute his shareholding and preclude him from gaining control.
Regarding the issuance of shares, the Court in Shefsky held that the corporation in the circumstances did not need to offer the shares to the plaintiff or to the other existing shareholders. Without evidence to the contrary, the timing, source and pricing of the financing was solely a matter of the directors’ business judgment. No evidence was produced in support of the claim that the shares were sold below market value. Absent some shareholders agreement to the contrary, a corporation is free to raise funds in a manner consistent with the best interests of the corporation. In any event, a loss of value to shares is a matter that affects all shareholders and such a claim “belonged to the corporation”. In other words, a claim of this nature must be brought by the corporation (against, say, the directors or some of them) in the form of a derivative action. The plaintiff cannot seek to obtain personal relief under an oppression action in such a case.
In respect to the loss of an opportunity to gain control of the corporation, the Court found that the opportunity was merely speculative or hopeful. The Court held that “the ability of the disappointed or aggrieved to avail themselves of the oppression action and its remedies must be carefully circumscribed so as to not expand the legal right to mere aspirations or disappointments”.
The key takeaways are:
1) A corporation has the freedom to conduct its business as it wishes so long as it does so reasonably;
2) The corporation needs to have regard for the reasonable expectations of shareholders;
3) A shareholder may avail itself of an oppression action remedy but only if he was personally harmed and not as part of the collectivity of shareholders; and
4) To succeed in such an action, the shareholder needs to furnish objective evidence that his reasonable expectations were not met in a manner that caused him compensable loss.
Invitation for Discussion:
Our litigation lawyers are skilled at resolving investor disputes. If you would like to discuss this blog in greater detail, or any other business litigation matter, please do not hesitate to contact one of the lawyers in the Business Litigation group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.