The Limits of the Oppression Remedy: BC Supreme Court Declines to find Oppression in case of Failed Corporate Reorganization: McDougall v Knutsen, 2023 BCSC 211

oppression remedy

The oppression provisions contained in s.227 of the BC Business Corporations Act, SBC 2002, c.57 (the “Act”) contemplate a broad remedy for shareholders of a corporation to address oppressive or unduly prejudicial conduct by their fellow shareholders. The focus of the oppression remedy is fairness, granting the Court significant powers to make orders with a “view to remedying or bringing an end to the matters complained of” (para 70 and 76).

However, it does not follow from this apparent breadth that the remedy stands ready to fix every complaint a shareholder has, however it may arise. The limits of the oppression remedy were recently shown in the BC Supreme Court’s decision in McDougall v. Knutsen, 2023 BCSC 211.

The case involved the collapse of the business relationship between three sophisticated businesspersons involved in the operation of a closely-held corporation, Cobra Ltd (“Cobra”).

The three parties, the three primary shareholders of Cobra, had planned for a corporate reorganization (the “Reorganization”) to complete on May 7, 2015 (the “Completion Date”). The Reorganization was intended to allow the three parties to combine their skills and share in Cobra’s expansion (and profits). The parties had a shareholders agreement in place prior to the Reorganization, the terms of which the parties contemplated would carry forward in similar form.

The Reorganization involved a “freeze” of the then-current value of Cobra by the exchange of the common shares held by the various shareholders for equally-valued preferred shares, allowing for the contemporaneous subscription of common shares for a nominal cost in agreed-upon percentages. The parties also planned for the Reorganization to meet the requirements of s.86 of the Income Tax Act, RSC 1985, c.1, so as to not trigger immediate tax consequences. Generally speaking, the Reorganization contemplated that each of the parties would share an approximate one-third of Cobra’s growth into the future and would be appointed a director of the company.

To the parties’ disappointment, the Reorganization did not close for three reasons:

(a) First, one month prior to the proposed closing date, a small, minority shareholder refused to sign the closing documents, triggering a buy-out provision in the Shareholders Agreement and litigation, which was not settled until more than three years after the Completion Date.

(b) Second, the spouse of one of the parties commenced divorce proceedings and obtained an injunction restraining the disposition of that party’s property until over four years after the Completion Date.

(c) Third, due to the passage of time, an updated valuation was required to ensure the correct freeze value was used, in order to close.

Following the collapse of the Reorganization, the Plaintiffs brought oppression proceedings, seeking orders that the Defendants pay $150,000 based on the freeze price of the Class A preferred shares, as well as $1,213,000 for the Class A common shares, both of which the plaintiffs expected to receive as a result of the Reorganization. Damages were also sought for the termination of the plaintiff (through his corporation) as an employee of Cobra.

In setting out the law of oppression, the Court placed a clear emphasis on the effect of the allegedly oppressive conduct in making a finding of oppression and causation, quoting from the Supreme Court of Canada’s decision in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69 [BCE]:

[75] Returning to BCE Inc., the Court specifically noted that “as in any action in equity, wrongful conduct, causation and compensable injury must be established in a claim for oppression”: BCE Inc. at para. 90…

[emphasis in original]

The Court was also clear to note that the oppression remedy does not displace the business judgment rule applicable to directors: para 78.

The plaintiffs cited several incidents of alleged “oppressive conduct”, including the failure of the parties to agree on the terms of a “comfort agreement” requested by the plaintiff prior to the closing of the Reorganization, the use of corporate funds to repay the defendants’ shareholder loan, the defendants’ decision to have Cobra purchase a Mexican timeshare property, the failure to have Cobra adopt a $5,000 limit for non-ordinary expenses, the termination of the plaintiff’s employment with Cobra, and the failure to implement the Reorganization.

The Court declined to find oppression or unfairly prejudicial conduct on all grounds.

With respect to the “comfort agreement”, the Court held that, despite their general common goal and business relationship, they were negotiating in good faith as arm’s length individuals, acting to protect their own self-interests. The Court reasoned that the plaintiff had not (and likely could not have) established a reasonable expectation that the parties would agree to the terms of “comfort agreement” and their failure to do so was not oppressive.

The repayment of the defendants’ shareholder loan was similarly not oppressive, as such payments were common in the ordinary course of business and that, in any event, the plaintiff had not suffered any compensable loss caused by the conduct.

The Court, however, did find that the purchase of the timeshare breached the plaintiff’s reasonable expectations as it was made without a meeting of the board (though ratified at a later board meeting). It nevertheless declined to find oppression, reasoning that the business judgment rule applied and, again, that the Plaintiff had suffered no compensable financial harm.

The Court went on to find that the decision to terminate the plaintiff’s employment with Cobra was made in good faith, in the best interests of the company, and therefore not oppressive or unfairly prejudicial.[1]

Finally, and most critically, the Court declined to find oppression arising from the collapse of the Reorganization, despite the fact that the plaintiffs were left with only approximately 22% of Cobra’s shareholdings, as opposed to an equal one-third share. The parties had contemplated from the start that the Reorganization might be delayed. Further, it is not unusual in the commercial world for matters not to close on time for any number of reasons, including as a result of protracted litigation. The Court held that the defendants had not caused any of the delay themselves, and that, accordingly, had not caused the Reorganization not to be implemented. In light of the requirement in BCE that causation be shown, oppression could not follow.

This case serves as a clear reminder of the limits of the oppression provisions of the Act. They do not exist as a mechanism for shareholders to find remedy in the Courts whenever and however aggrieved. Rather, this decision illustrates that the outer limits of the oppression remedy are defined, at minimum, by:

(a) the reasonable expectations of the aggrieved shareholder;

(b) the party’s ability to show a compensable loss and sufficient causation; and

(c) the application of the business judgment rule.

If you have any questions relating to the article, please contact Matthew Nakatsu or a member of our Business Disputes Group.

[1] The Court did, however, conclude that, separate from a finding of oppression, as an employee, the plaintiff was entitled to damages for his termination without cause and without notice and awarded $98,075.00.

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