Court of Appeal Confirms that Shareholder Oppression Remedies Can Be Sold
May 16th, 2018
Several years ago, the Ontario Court of Appeal issued a decision that surprised many corporate law practitioners and other experts. The court found that a shareholder who sells his or her private company shares to a third party can also sell his or her oppression remedy claims.
The company in question is a small corporation which manufactures sauna equipment in Toronto. There are two shareholders: an elderly Canadian citizen residing in Shanghai who is a 40% minority shareholder (the minority shareholder) and the majority shareholder.
The minority shareholder claimed that the company and the majority shareholder had failed to pay money owing to him as a shareholder and brought an oppression action against them. As the action unfolded, he was ordered to travel to Ontario for examinations, but was unable to do so, citing health reasons.
The minority shareholder subsequently assigned his shares, his contractual rights in respect of those shares, and his oppression claim to a former employee of the company, who was his old friend (the assignee). She paid him $1 for the transfer.
The registrar of the Superior Court gave the assignee permission to continue the oppression action. She then filed a motion to add additional defendants to the action.
Decisions Leading to the Appeal
The motion judge found that the transfer of the cause of action for oppression was invalid and the assignee’s motion was dismissed. The assignee appealed the dismissal.
The Divisional Court dismissed the appeal, finding that:
- A current shareholder can seek an oppression remedy for past oppressive conduct against a former shareholder only if the remedy sought is for the benefit of all shareholders (based on principles laid out in a previous Court of Appeal decision); and
- The assignment of the cause of action failed to meet the elements required for such a transfer.
The Issue on Appeal
The sole issue the Court of Appeal had to consider was whether the assignee can sue the company and majority shareholder in an oppression action where the original minority shareholder assigned his shares, his contractual rights with respect to those shares, and the oppression action itself?
The Caselaw on Assigning Causes of Action
The Court of Appeal noted that neither the original motion judge nor the Divisional Court had considered the leading case on the validity of assignments in causes of action (which was later affirmed by the Supreme Court). That case confirmed, among other things, that some actions may be assignable, including those where an assignee has a property interest to which the cause of action is ancillary and those where the assignee has a legitimate pre-existing commercial interest in the enforcement of the claim.
Ancillary Causes of Action
The Court went on to note that in this case, the assignee had been assigned the property rights in the shares originally outlined in an investment agreement between the minority shareholder and majority shareholder. The investment agreement had made the minority shareholder a 40% owner of the shares. The assignee was assigned the cause of action here as an incident of these property rights.
Pre-Existing Legitimate Interests
The motion judge had found that the oppression claim could not be assigned as an ancillary cause of action because it had not been incident to the acquired shares but was a separate cause of action based on the contractual agreement or understanding between the minority shareholder and the majority shareholder. As a separate cause of action, it could not be assigned because the assignee had no legitimate interest in its enforcement.
The Court of Appeal found that this was an error: while it is correct to say that the assignee did not have a pre-existing legitimate interest in enforcing the oppression claim, it was clear that the shares, the contractual rights that accompanied them, and the oppression claim that was incident to these property rights had been assigned to the her, in writing, by the minority shareholder.
No Double Recovery
The Court of Appeal had also noted that there were two Ontario cases that precluded the assignee from asserting the oppression remedy unless she was claiming a remedy that would benefit the entire company.
The Court of Appeal found that the motion judge had erred in applying the principles that flowed from those cases to the facts at hand. Those cases both involved the purchase of publicly traded shares on the open market for their fair market value and involved no assignment of other rights that accompanied the purchase, hence the decision that the right to the oppression remedy remained with the original shareholder who sold the shares.
The Court noted, however, that the corporation in question is privately held. Moreover, the investment agreement between the minority and majority shareholders, which gave rise to the property interest in the shares, had been transferred to the assignee for $1. If the allegations of oppression were true, and the majority shareholder was not honouring his obligations to the minority shareholder, then the shares are not worth any more than $1 unless the assignee can successfully pursue an oppression remedy.
The minority shareholder claims that he is ill and not in a position to continue with the oppression remedy action. He therefore transferred both the shares and his right to an oppression remedy to the assignee so that she can try to obtain the value of the shares based on the rights that the majority shareholder owes to the minority shareholder. If, for instance, the minority shareholder died, his estate would be able to pursue the oppression remedy.
The Court went on to say:
While a successful oppression remedy might be viewed as a windfall to the appellant because she has only paid $1, she has assumed the risk of the litigation and she might come away with nothing. It is not for this court to decide whether the bargain struck between [the minority shareholder] and [the assignee] was an appropriate one. There is no double recovery or windfall here.
The Court of Appeal concluded that the assignee was entitled to pursue the oppression action based on the transfer of the shares, and the assignment of the ancillary right to enforce the oppression claim in respect of those shares.
The appeal was allowed.
Financial Litigation is a boutique Toronto law firm focused on asset protection. 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.