Court of Appeal Emphasizes that the Oppression Remedy is an Equitable Claim and Requires “Clean Hands”
The Ontario Court of Appeal recently re-emphasized the idea that an oppression remedy is, fundamentally, an equitable claim requiring clean hands and the conduct of all parties will be a factor in a court’s analysis of whether relief is available to minority shareholders.
At the center of this dispute was a family-owned company, D’Andrea Management Inc. (DMI), which had been used by the families to acquire a commercial property. Daney D’Andrea (Daney), the director of DMI, oversaw the purchase, development, and management of that property.
Some minority shareholders claimed that Daney had diverted interests in the property to his benefit and that these transactions were oppressive to their interests. They also claimed that there had been a broader conspiracy that allowed DMI to default on a mortgage so that a different company that Daney controlled could take assignment of the power of sale under that mortgage and sell the property. The minority shareholders sued.
Original Trial Decision
After the a 19-day long trial, the original trial judge rejected the claims of the minority shareholders and awarded costs to Daney and the other respondents, finding, among other things, that the minority shareholders had failed to establish (on a balance of probability) that Daney and the other defendants had acted in an oppressive manner.
The trial judge noted that since the oppression remedy is an equitable remedy, it was necessary to consider the conduct of both the minority shareholders as well as Daney and the other defendants in making a final decision.
The judge found that two of the minority shareholders had refused to agree to discharge the second mortgage in an attempt to gain leverage over Daney and DMI so that they could renegotiate their original shareholders’ agreement and reduce or eliminate the amount of money that the one shareholder owed to DMI. The judge concluded that even if a postponement of the mortgage had been presented, these two minority shareholders would have attempted to extract some benefit.
The court further found that as a result of the conduct of these two minority shareholders, Daney had to protect DMI’s interests by forming another company and carry out the mortgage deal. The court specifically noted that Daney was the only shareholder who was “risking his personal financial affairs” through a guarantee, and concluded that the creation of this other company was not oppressive since it was in DMI’s interests to close the deal. In addition, Daney justifiably no longer wanted to be the only shareholder liable on the mortgage- his conduct could not be seen as oppressive.
The minority shareholders appealed the dismissal of their original claim and sought leave the appeal the costs order.
Issues on Appeal
The minority shareholders raised three grounds of appeal with respect to the oppression remedy, claiming that the original trial judge:
- Had misapplied the “clean hands doctrine” as it applies to the oppression remedy;
- Had erred in finding that they did not have reasonable expectations; and
- Did not give adequate weight to the fact that one of the respondents obtained benefits belonging to DMI.
The Court of Appeal dismissed the appeal, noting that all of the issues raised by the minority shareholders were based on alleged errors of fact by the trial judge, but that they could not show any misapprehension of fact or error of law made by her. The Court concluded that the trial judge had made findings of fact supported by evidence.
The Court of Appeal noted that the trial judge had criticized Daney for diverting the benefit of the mortgage deal to his new company, but the agreement to repay this money resolved this dispute. In addition, the trial judge had also noted that the minority shareholders had offered no evidence that the amount payable to Daney for his guarantee or his management was unreasonable.
At Financial Litigation, Eli Karp is an experienced commercial litigator who focuses on the financial elements of legal disputes. Eli continually strives to minimize the impact of commercial disputes on our client’s financial security, and resolve litigation as quickly as possible, so they can get back to business. Schedule your consultation online, or by calling us at 416-769-4107 x1.