Ontario Court Emphasizes that Oppression Remedy is Not Available to Shareholders Who “Simply Want Out”
March 9th, 2018
Last year, one of the three shareholders in Dare Foods, the well-known Canadian manufacturer of cookies, crackers, and candy, wanted to sell her interest in the company and sought relief under the oppression remedy provisions (s. 248) of the Ontario Business Corporations Act (OBCA). She sought a court-ordered sale of her shares to her two brothers and proposed that the court appoint a third party valuator to determine the value of her shares and order the brothers to purchase the shares at that price, without a minority discount.
The Ontario Superior Court dismissed her action, finding that she had failed to establish any basis for an oppression remedy.
Dare Foods was founded in 1889 when Charles H. Doerr opened a grocery store in Berlin, Ontario (present-day Kitchener). Since then, the business has grown into a huge Canadian brand, with annual sales of approximately $300 million, employing 1200 workers. The business has always been under the control of the Dare family.
In the early 1940’s, Mr. Doerr’s grandson, Carl Dare (Carl), took over the Dare Foods business. He was the driving force behind the expansion of the company.
In 1980, Carl carried out an estate freeze and transferred his shares in three operating companies- Dare Foods, Biscuit Division) Limited, Dare Foods (Candy Division) Limited, and Dare Foods Limited- to a newly created holding company: Serad Holdings Limited (Serad).
The common shares of Serad were issued to a newly created family trust, the Dare Family Trust (the Trust), with Carl’s three children Bryan Dare (Bryan), Graham Dare (Graham) and Carolyn Dare Wilfred (Carolyn) as beneficiaries.
The Relevant Agreements
As part of the estate freeze, a series of shareholder agreements were entered into for Serad. While it was the Trust, not the three children, who was the shareholder for Serad, it was the children who signed the shareholder agreements as beneficiaries of the Trust.
A second shareholders agreement (the Second Shareholders Agreement), dated November 1980 contained restrictions on the future transfer of the shares of Serad by the three children. The second agreement contained a “right of first offer” (i.e. an agreement that if any of the three children were to sell their shares of Serad, the shares must first be offered to the other two family members at fair market value, if the others decline the shares can then be sold to a third-party purchaser but only “at a price not less than” and on “terms no less onerous” than those offered to the family members). The purpose of this was to ensure that family members had a chance to retain control of Serad if they wanted to.
In May 2001, the Trust assets (i.e. the common shares of Serad) were distributed to the beneficiaries- Bryan, Graham, and Carolyn each received 140 common shares. A valuation report estimated that the shares were worth approximately $120 million at the time. Upon receipt of the shares, Carolyn, Bryan, and Graham confirmed and re-evaluated the Second Shareholder Agreement and entered into a further shareholders agreement that allowed them to hold their Serad shares through personal holding companies.
In July 2001, Carolyn sent a notice of sale under the Second Shareholders Agreement offering to sell her 140 common shares of Serad to Bryan and Graham for $39.6 million (based on the 2001 valuation of $120 million). The brothers rejected her offer. After much back and forth, Carolyn offered to sell all of her Serad shares to Carl for $5 million. She and Carl eventually entered into an agreement in which Serad redeemed only 25% of her shares for $5 million, terminated her $50,000 salary, and provided her with annual dividends of $335,000 for five years. As part of this arrangement, she could not attempt to sell or redeem any of her remaining shares for five years.
In January 2014, Carolyn’s lawyer wrote to Dare Foods and indicated that Carolyn would be selling her shares. He offered a purchase price of $55 million and threatened litigation if the shares were not purchased at that price. The offer was rejected. Carl passed away in April of that year. A second offer to Bryan and Graham offering to sell Carolyn’s shares for the $55 million was also rejected.
In November 2014, Carolyn’s lawyer threatened a lawsuit if Bryan and Graham did not purchase Carolyn’s shares. He claimed that Carolyn had been treated oppressively. Carolyn filed her claim in June 2015, suing both brothers, Serad, and another holding company (the defendants).
The Positions of the Parties
Carolyn argued that the defendants’ conduct had been unfairly prejudicial to her interests as a shareholder, or had unfairly disregarded her interests as a shareholder, because:
- They had refused to purchase her shares which had the effect of “holding her shares hostage” and prevented her from realizing a valuable asset at a time when she needed money; and
- Serad’s dividend policy was unfair as it was controlled by the brothers and Carolyn had no input into it.
Carolyn argued that she met the oppression remedy requirement under s. 248(2) of the OBCA and that the appropriate remedy was a court-ordered buyout of her Serad shares under s. 248(3)(f) of that Act.
The defendants argued that Carolyn’s action should be dismissed and submitted that they had done nothing that is unfairly prejudicial or that unfairly disregarded Carolyn’s interests as a shareholder of Serad. They further argued that Carolyn sought to invoke the oppression remedy simply because she no longer wanted to be a shareholder and wanted liquidity for her shares.
The Law on the Oppression Remedy
The governing legal principles for the oppression remedy are set out in BCE Inc. v. 1976 Debentureholders, and can be essentially be summarized as follows:
- The court is to make the following two inquiries in deciding an oppression case: (1) Does the evidence support the reasonable expectation asserted by the claimant? (2) Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms “oppression”, “unfair prejudice” or “unfair disregard” of a relevant interest?
- Oppression is an equitable remedy. It seeks to ensure fairness – what is “just and equitable”. It gives a court broad, equitable jurisdiction to enforce not just what is legal but what is fair.
- Oppression is fact specific. What is just and equitable is judged by the reasonable expectations of the stakeholders in the context and in regard to the relationships at play. Conduct that may be oppressive in one situation may not be in another.
- The concept of reasonable expectations is objective and contextual. The actual expectation of a particular stakeholder is not conclusive. The question is whether the expectation is reasonable having regard to the facts of the specific case, the relationships at issue, and the entire context, including the fact that there may be conflicting claims and expectations.
- In determining whether a reasonable expectation exists, the court may consider factors including general commercial practice; the nature of the corporation; the relationship between the parties; past practice; preventative steps the claimant could have taken; representations and agreements; and the fair resolution of conflicting interests between corporate stakeholders. Shareholder agreements may be viewed as reflecting the reasonable expectations of the parties.
- The concepts of oppression, unfair prejudice and unfairly disregarding relevant interests indicate the type of wrong or conduct that the oppression remedy is aimed at. Oppression is the wrong of the most serious sort and carries the sense of conduct that is coercive and abusive, and suggests bad faith. Unfairness involves less offensive conduct – it may admit of a less culpable state of mind that nevertheless has unfair consequences. Unfair disregard is the least serious of the three injuries or wrongs and extends the remedy to ignoring an interest as being of no importance, contrary to the stakeholders’ reasonable expectations.
- The directors of a corporation owe a fiduciary duty to the corporation and only to the corporation. Where the interests of the stakeholders and the corporation conflict, the directors owe their duty to the corporation, not the stakeholders. The reasonable expectation of stakeholders is that the directors act in the best interest of the corporation.
The main issue for the court to determine was whether Carolyn had proven that she had a reasonable expectation of liquidity for her Serad shares (i.e. that the defendants would purchase her shares when she wished to sell them). The court concluded that she had not established this.
While the Second Shareholder’s Agreement included the right to first offer, this did not obligate any of the three siblings to purchase shares from one another (that would have required a shotgun buy-sell clause or a put right clause). Rather than creating a positive obligation, it only provided the siblings with the opportunity to purchase one another’s shares at a fair market value prior to those shares being offered to a third-party. Carolyn had agreed to the right to first offer at the time of the estate freeze in 1980, when the shares were transferred to her personally in 2001, and again when she tried to sell her shares to her brothers in 2001 and 2014.
In addition, while Carolyn argued the court-ordered buyout was warranted because her shares were unmarketable and had no value to a third-party purchaser, the court noted that there was nothing to support this position, stating:
In my view, the oppression remedy in s. 248 is not designed to relieve a minority shareholder from the limited liquidity attached to his or her shares or to provide a means of exiting the corporation, in the absence of any oppressive or unfair conduct. Carolyn has not suggested that there has been any mismanagement of the corporation, improper dealing or any unfair conduct (apart from the dividend issue discussed below). I reject Carolyn’s submission that the refusal of the defendants to purchase her shares is itself a basis for relief under s. 248.
Furthermore, the court noted that Carolyn was essentially seeking to have Serad use its resources to purchase her shares and was putting her own interests ahead of those of the corporation. Not only was this was viewed as problematic, but evidence presented by Bryan and Graham (both active directors of Dare Holdings and Serad at the time) also established that Dare Foods’ resources were better allocated towards new business ventures the company was planning to embark on rather than the purchase of Carolyn’s shares.
The court emphasized that:
This is not a case where any difficulties in shareholder relations or irreconcilable differences among family members have had any adverse effect on the underlying Dare Foods business. Nor is it the case of an “incorporated partnership” where a shareholder has contributed sweat equity to build a business and has been improperly excluded. Carolyn has never played a role in the Dare Foods business. She simply wants out.
Financial Litigation is a litigation boutique that exclusively handles disputes relating to corporate and financial matters, including oppression remedies. Eli Karp represents individuals harmed by oppressive activities, and regularly advise on oppression claims. He understands what is required to defend these claims and can represent both Plaintiffs or Defendants. Contact Eli online to schedule a consultation, or by calling him at 416-769-4107 x 1.