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The Court of Appeal Reasons That in Quebec, Foss v. Harbottle Stands on Two Legs

The Court of Appeal Reasons That in Quebec, Foss v. Harbottle Stands on Two Legs

In Groupe d’action d’investisseurs dans Biosyntech c. Tsang, 2016 QCCA 1923, the Quebec Court of Appeal has re-affirmed that a shareholder has no direct cause of action against a director for loss of share value flowing from harm done to the company.

While the result is hardly ground-breaking – it simply reflects the 19th century Foss v. Harbottle rule, well-known in common law jurisdictions – the Court of Appeal justifies its conclusion on the civilian premise that the only damages that are actionable are those that are the “immediate and direct consequence” of a wrongful act.

This ruling also demonstrates the extent to which an authorization to institute class proceedings can be denied “based purely on a meticulous analysis of the legal argument under-pinning the factual allegations”.[1]


The shareholders of BioSyntech Inc. had lost the value of their shares when the company went bankrupt. A group of shareholders blamed the company’s bankruptcy on the company’s former directors, who had allegedly

  1. Failed to disclose results of a pivotal clinical trial;
  2. Failed to reduce the excessive rate at which BioSyntech’s cash was being depleted;
  3. Failed to diligently pursue opportunities to obtain additional financing; and had
  4. Filed a notice of intention under the Bankruptcy and Insolvency Act (“B.I.A.”), sending BioSyntech into an avoidable bankruptcy.

In bankruptcy proceedings before the Superior Court, the shareholders had admitted that the damages they claimed were indirect. The directors’ alleged wrongdoing only caused direct damage to BioSyntech, “and this damage, in turn, caused the loss of share value claimed by the shareholders”.[2]

Justice Hamilton denied authorization at first instance. He recognized an “ongoing debate” as to whether shareholders might possess a direct cause of action against directors for a breach of their duty of care under section 122 b) of the Canada Business Corporations Act.[3] However, in light of the indirect nature of the damages claimed, the first instance judge was of the view that the shareholders had failed to demonstrate that the alleged facts seem to justify the conclusions sought.[4]

No recovery for “indirect” damage

The appeal was dismissed. In Schrager J.A.’s view, the shareholders’ claim must flounder because article 1607 of the Civil Code of Quebec “only permits recovery of damage which is the direct consequence of a harmful act”.[5]

Indirect damage, in his words, is not the injury “caused by the act of the wrongdoer, but rather is caused by the damage which the wrongdoer caused”.[6] In this case, the loss of share value was indirect, since

[23] […] the damages […] were not caused directly by the directors alleged breach of their duty of care by not obtaining, for example, adequate financing for BioSyntech. That alleged fault might (arguably) have caused (in whole or in part) the insolvency and inability of BioSyntech to pursue its business. It is the insolvency which caused the shares to lose their value so that such damage would be caused indirectly to the shareholders by the directors.

This civilian argument – relying as it does on article 1607 of the Civil Code of Quebec – essentially replicates the Foss v. Harbottle rule well-known in common law jurisdictions. As such, “individual shareholders have no cause of action in law for any wrongs done to the corporation and that if an action is to be brought in respect of such losses, it must be brought either by the corporation itself (through management) or by way of a derivative action”.[7]

This rule is a “consequence of the fact that a corporation is a separate legal entity”.[8] Moreover, as a matter of policy, in the absence of Foss v. Harbottle:

[25] […] shareholders could potentially sue where a company would also have a right of action against the same wrongdoer who would become liable to compensate both the shareholders and the company for their losses. If only the company sues then all its stakeholders benefit; the proceeds of the lawsuit are notionally used by the company to pay the creditors and any surplus enhances shareholder value. Without the rule, which is the scenario put forward by Appellants, the shareholders would jump the queue or the order of priority under the B.I.A. and be paid before creditors for prejudice suffered by the company.

The Court of Appeal added that there was “really nothing” in either of the Supreme Court of Canada’s leading decisions in Peoples Department Stores Inc. (Trustee of) v. Wise and BCE Inc. v. 1976 Debentureholders that suggests “that a breach of the duty of care entitles shareholders to recover compensation from directors for indirect injury”.[9]

Schrager J.A. nevertheless recognized that, in some circumstances, the loss of share value can be a direct injury, independent from damage suffered by the company.

In Houle v. Banque Canadienne Nationale, for instance, shareholders “successfully sued the company’s banker for damage caused by the bank which abruptly and negligently called for repayment of the company’s borrowings”,[10] thereby harming the shareholders who were then in the process of selling their shares. The damage suffered by a shareholder would also be direct and independent in the case where a shareholder

[31] […] purchases his shares based on the negligent or fraudulent misrepresentation of directors. Such a scenario causes the shareholder to have parted with his money and buy worthless shares and thus, suffers harm independent from the company giving rise to a good cause of action against directors for damages directly suffered by the shareholder.[11]

In this case, the alleged damage was indirect and therefore not actionable.

The Court of Appeal chose not to wade too heavily into the “ongoing debate” over whether the Supreme Court of Canada’s leading decisions in Peoples and BCE contemplate a direct cause of action for shareholders against directors and officers for a breach of their duty of care. On this point, Schrager J.A. limited himself to saying that the “facts of the matters before the Supreme Court did not strictly require consideration of whether shareholders are included in “stakeholders” to whom directors owed their duty of care under Section 122 b) C.B.C.A.”.[12]

Alternative recourse?

Finally, Schrager J.A. turned to the question of what other recourses may have been open to the shareholders, faced as they were with the bankruptcy trustee’s refusal to institute proceedings against the directors on behalf of the company.

He chose not to opine on the question of whether the shareholders could have sought an order against the trustee to “reverse or modify the act or decision complained of”, pursuant to section 37 of the B.I.A.  He also declined to decide whether, pursuant to section 38 of the B.I.A., the shareholders could have obtained an order authorizing them to exercise the company’s rights of action. Lastly, while an action in oppression against the directors pursuant to section 241 C.B.C.A. was theoretically possible, courts have split on the question of whether or not an action in oppression could be authorized as a class action. The former, after all, “is already representative in nature in that it provides a potential remedy not only to the petitioner but to all shareholders of a class who suffer from the oppressive conduct”.[13]

Unfortunately for the rest of us, these legal questions were not deserving of the same “meticulous analysis” at the authorization stage!

[1] BioSyntech, at para. 33.
[2] BioSyntech, at para. 32.
[3] BioSyntech, at para. 21.
[4] As is required by article 1003, sub-paragraph b) of the former (and governing) Code of Civil Procedure, a condition which remains unchanged in the corresponding article 575(2) of the new Code of Civil Procedure.
[5] BioSyntech, at para. 22
[6] BioSyntech, at para. 23.
[7] Hercules Managements Ltd. v. Ernst & Young, 1997 CanLII 345 (SCC), [1997] 2 S.C.R. 165, at para. 59.
[8] Ibid, citing Prudential Assurance Co. v. Newman Industries Ltd. (No. 2), [1982] 1 All E.R. 354, at p. 367.
[9] BioSyntech, at para. 26.
[10] BioSyntech, at para. 30.
[11] BioSyntech, at para. 31.
[12] BioSyntech, at para. 21.
[13] BioSyntech, at para. 41, citing Fradet c. Société Asbestos ltée, 1990 CanLII 3345 (QC CA), at para. 59, Noble v. North Halton Golf and Country Club, 2016 ONSC 2962 (CanLII), Stern v. Imasco Ltd., 1999 CanLII 14934 (ONSC), and Jellema v. American Bullion Minerals Ltd., 2010 BCCA 495, at paras. 21-25.

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