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Oppression: revisiting the governing principles of directors’ personal liability

Oppression: revisiting the governing principles of directors’ personal liability

A recent decision of the Quebec Court of Appeal (Black c. Alharayeri, 2015 QCCA 1350) provides a comprehensive review of the issue of the personal liability of directors in the context of an oppression claim. [Please note, the author of this post, Emma Lambert, was one of the attorneys representing the Respondent.]

This case involved a claim under section 241 of the Canada Business Corporations Act (“CBCA”) brought by Ramzi Mahmoud Alharayeri (“Alharayeri”), the former President, Chief Executive Officer and largest minority shareholder of the mise en cause Wi2Wi Corporation (“Wi2Wi”), against certain directors of Wi2Wi, specifically Hans Peter Black (“Black”), Andrus Wilson (“Wilson”), Rob Roy (“Roy”) and David Tahmassebi (“Tahmassebi”), seeking damages for conduct that Alharayeri deemed to be oppressive, unfairly prejudicial and that unfairly disregarded his interests.

Though Alharayeri’s oppression claim was originally wider in scope, the trial judge, the Honourable Stephen W. Hamilton J.S.C., determined that Alharayeri had succeeded in proving oppression in relation to two specific acts: the failure to convert Alharayeri’s preferential Class A and Class B Shares and the failure to ensure that Alharayeri’s rights as the holder of the Class A and Class B Shares were not prejudiced by a private placement. In light of the circumstances, the trial judge found that it was “fit” to order Black and Wilson to personally pay damages in the amount of $648,310, with interest, the additional indemnity and costs, to Alharayeri as a remedy to this oppression. The trial judge found that although each of the defendants had been involved in the oppressive conduct and had benefitted from changes to the stock option plan, it was Black and Wilson who had played the lead roles in the discussions at the Board level, participated in the private placement and benefitted from the dilution of Alharayeri’s preferential shares. Alharayeri’s action against Roy and Tahmassebi was dismissed.

Black and Wilson appealed the first instance judgment and Alharyeri filed an incidental appeal on the issue of the valuation of his Class A and Class B shares. Ultimately, the Court of Appeal dismissed both the principal and the incidental appeals. A particular issue of interest in the Court of Appeal’s decision was its treatment of the governing principles regarding the personal liability of directors, in this case of Black and Wilson, in matters of oppression.

On the issue of their personal liability, Black and Wilson had argued in appeal that the trial judge had erred in ruling that they had played the lead roles in the discussions at the Board level and that they had personally benefitted from the non-conversion of Alharayeri’s preferential shares. They maintained that the evidence adduced at trial was insufficient to demonstrate that they had personally committed the abusive and prejudicial acts towards Alharayeri. They also argued that the judge had violated the audi alteram partem rule in finding that they had personally benefitted from the non-conversion of the Alharayeri’s preferential shares on the basis of facts that had not been alleged and arguments that had not been pleaded.

By way of an introduction to the issue of the personal liability of directors, Justice Yves-Marie Morissette writing on behalf of the Court of Appeal had the following comments:

[13] Un autre arrêt de principe sur la portée de la même disposition mérite mention ici. Il s’agit du jugement de la Cour d’appel de l’Ontario dans l’affaire Budd v. Gentra[1]. Le juge Doherty, au nom d’une formation unanime de la Cour, écrivait:

[47] In deciding whether an oppression action claiming a monetary order reveals a reasonable cause of action against directors or officers personally, the court must decide:

Are there acts pleaded against specific directors or officers which, taken in the context of the entirety of the pleadings, could provide the basis for finding that the corporation acted oppressively within the meaning of s. 241 of the C.B.C.A.?

Is there a reasonable basis in the pleadings on which a court could decide that the oppression alleged could be properly rectified by a monetary order against a director or officer personally?

[48] The first requirement seems self-evident. No person should have to defend a lawsuit absent allegations which identify the conduct of that person said to render him or her liable to the plaintiff. This statement of claim utterly fails to deal with the director defendants or management defendants on an individual basis. Rather, they are treated as a single entity, each indistinguishable from the other, and all serving as the cat’s paw of the controlling shareholders. Nowhere does the appellant allege that any named director or officer did or failed to do any specified act or participated in any identified way in any of the decisions or manoeuvres which the appellant relies on in support of his claim. The claim does no more than identify the individuals as directors or officers of Royal Trustco at some unspecified time. There is no attempt to connect any individual director or officer to the alleged corporate oppression.

[…]

[52] … To maintain an action for a monetary order against a director or officer personally, a plaintiff must plead facts which would justify that kind of order. The plaintiff must allege a basis upon which it would be “fit” to order rectification of the oppression by requiring the directors or officers to reach into their own pockets to compensate aggrieved persons. The case law provides examples of various situations in which personal orders are appropriate. These include cases in which it is alleged that the directors or officers personally benefitted from the oppressive conduct, or furthered their control over the company through the oppressive conduct. Oppression applications involving closely held corporations where a director or officer has virtually total control over the corporation provide another example of a situation in which a director or officer may be held personally liable to rectify corporate oppression.

[14] L’arrêt Budd v. Gentra a posé plusieurs jalons utiles dans l’analyse de recours pour abus intentés en vertu de l’article 241 de la LSA. C’est particulièrement le cas en ce qui concerne l’hypothèse d’une condamnation personnelle des administrateurs d’une société. Se fondant sur cet arrêt, qui présente un tour d’horizon de la jurisprudence alors en existence, un auteur offre la description suivante des situations qui se prêtent à cette hypothèse[2]:

14.1.1.1. Where directors obtain a personal benefit financial benefit from their conduct.

14.1.1.2. Where directors have increased their control of the corporation by the oppressive conduct.

14.1.1.3. Where directors have breached a personal duty they as directors.

14.1.1.4. Where directors have misused a corporate power.

14.1.1.5. Where a remedy against the corporation would prejudice other security holders.

On the first issue regarding Black and Wilson’s lead roles in the discussions at the board level as justification for their personal liability, the Court of Appeal determined the following:

[37] Tout d’abord, l’hypothèse d’une condamnation personnelle d’un ou de plusieurs administrateurs semble bien admise. L’auteur Markus Koehnen écrit à ce sujet[3]:

Directors and officers can be held personally liable for corporate oppression. Their liability in this regard does not depend on the breach of a specific statutory duty or common law tort but is substantially broader. Personal liability for directors and officers does not implicate corporate veil principles but involves the proper interpretation of the oppression remedy. Although the oppression remedy creates a broader personal basis of personal liability for directors than either the common law or specific provisions of statutory liability, not all oppression claims justify orders against directors. The plaintiff must make specific allegations against directors to found a claim against them; otherwise directors’ liability would be engaged each time the oppression remedy was invoked.

Le JurisClasseur Québec fait écho à ces observations[4]. Les auteurs du fascicule consacré au « Redressement en cas d’abus ou d’iniquité » commentent[5]:

Le recours en cas d’abus peut viser directement les administrateurs d’une société lorsqu’ils participent au traitement inéquitable du demandeur. […] De façon générale, il faut prouver que ces derniers ont posé des actes abusifs ou injustes justifiant une sanction pécuniaire pour compenser les dommages. Selon la jurisprudence, il y a lieu d’ordonner un tel paiement lorsque les membres du conseil ont tiré un profit personnel de l’acte reproché ou lorsqu’ils ont accru leur contrôle sur l’entreprise.

[38] En outre, si l’on retenait l’argument des appelants, il deviendrait plus difficile, voire impossible, d’individualiser la responsabilité des administrateurs afin de départager ceux d’entre eux qui ne sont pas à l’origine de l’abus (au sens du paragr. 241(2) de la LCSA) et ceux qui le sont. Lorsque tous les administrateurs ne sont pas également compromis par leurs agissements, cela risquerait d’engendrer une forme d’immunité à l’avantage des administrateurs fautifs. Un tel résultat paraît incompatible avec le large pouvoir discrétionnaire que la LCSA confère au tribunal (« enforce not just what is legal but what is fair », écrit la Cour suprême) de même qu’avec la finalité réparatrice du recours régi par l’article 241 de la LCSA.

[39] Une fois ces précisions apportées, cet aspect du pourvoi se dissout en quelque sorte en une série de questions d’appréciation de la preuve, pour la résolution desquelles il était loisible au juge de première instance d’étudier les documents de la société déposés en preuve, tels que les procès-verbaux et le registre des valeurs mobilières de la mise en cause, afin de déterminer au(x)quel(s) des administrateurs on pouvait légitimement imputer une conduite abusive ou inéquitable.

Secondly, on the issue of whether the trial judge had violated the audi alteram partem rule in finding that Black and Wilson had personally benefitted from the non-conversion of Alharayeri’s preferential shares, the Court began its analysis by distinguishing the facts of Budd v. Gentra from the present case and then concluding that Alharayeri’s pleadings and allegations in demand had not been deficient. As such, the Court concluded that there was no basis to invoke any violation of the audi alteram partem rule. Furthermore, on the issue of the sufficiency of the evidence of Black and Wilson’s personal benefit, the Court concluded the following:

[56] Il est vrai que les appelants ne sont pas les seuls investisseurs à avoir bénéficié du placement privé, mais en leur imputant une responsabilité le juge ne fonde pas sa conclusion sur leur simple participation à cette opération de financement par ailleurs légitime. Il y a beaucoup plus. Eux seuls ont joué un rôle actif, non seulement dans la mise en place de ce placement privé, mais également dans le refus de convertir les actions privilégiées de l’intimée, et ce en l’absence de toute mesure parallèle susceptible de protéger les attentes légitimes de ce dernier. C’est ce faisceau de circonstances en arrière-plan qui fait du bénéfice personnel direct ou indirect retiré par les appelants un élément probant dans leur condamnation personnelle en vertu de l’article 241 de la LCSA.

[57] D’autre part, on ne saurait considérer que le bénéfice en question se limite à la valeur des actions ordinaires acquises en conséquence du placement privé. Même s’il est vraisemblable que la situation financière de la mise en cause à l’automne 2007 et ultérieurement était précaire et rendait très hypothétique, voire illusoire, la réalisation prochaine d’un profit tangible en numéraire, un bénéfice personnel ne revêt pas uniquement la forme d’un gain économique et en espèces. On peut inférer des quelques décisions recensées sur le sujet que le bénéfice retiré par un administrateur peut aussi consister en autre chose, comme le fait d’accroître son contrôle sur le capital-actions de la société et sur la conduite de ses affaires[6]. L’intimé le soulève aux paragraphes 13.6 et 13.7 de sa requête introductive d’instance, précitée au paragraphe [51] et la preuve démontre que le placement privé aura permis aux appelants, quoique surtout à l’appelant Black, d’asseoir leur contrôle sur la mise en cause.

[…]

[61] Il faut conclure de ce qui précède que les appelants ont tort lorsqu’ils reprochent au juge de les avoir condamnés en l’absence de toute preuve adéquate – bien au contraire, il y avait au dossier un preuve prépondérante pour servir d’assise aux conclusions énoncées au paragraphe [167] de motifs livrés en première instance.

[1] [1998] O.J. No. 3109 (C.A. Ont.).
[2] Markus Koehnen, Oppression and Related Remedies, Carswell, Toronto, 2004, p. 201 (references omitted).
[3] Markus Koehnen, Oppression and Related Remedies, Carswell, Toronto, 2004, p. 200.
[4] Raymonde Crête et Philippe D’Anjou, “Redressement en cas d’abus ou d’iniquité”, in JurisClasseur Québec, Droit des sociétés, fascicule 14, Montréal, LexisNexis, 2013, p. 14.
[5] Ibid., p. 19.

[6] Budd v. Gentra; Downtown Eatery, [2001] O.J. No. 1879 (C.A. Ont.), paragr. 62: “Grad and Grosman, in terminating the operations of Best Beaver and leaving it without assets to respond to a possible judgment, should have retained a reserve to meet the very contingency that resulted. In failing to do so, the benefit to Grad and Grosman, as the shareholders and sole controlling owners of this small, closely held company, is clear.”

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