Ontario Court Uses Oppression Remedy to Reward Beneficial Ownership to a Shareholder
May 28th, 2018
An Ontario Divisional Court decision highlights how courts can exercise their broad discretion under the oppression remedy provisions of the Ontario Business Corporations Act to recognize a beneficial shareholder interest in a corporation even where there is no written agreement evidencing such an interest.
In August 2011, Mr. Wong (Wong) sought and obtained assistance from Mr. Chahine (Chahine) when Wong’s company (VIL) encountered financial difficulties. Until January 2012, VIL carried on two businesses:
- Purchasing and reselling blow molded and other auto parts to Chrysler and other auto parts suppliers;
- Acting as a third party logistics supplier and freight forwarded of Chinese manufactured auto parts on a cost plus fees business (the Logistics business).
At the time that Wong sought Chahine’s help, VIL owed $13 million to its Chinese suppliers. VIL’s default in payment to it’s Chinese suppliers was also a breach of its supply contract with Chrysler, allowing Chrysler to sue VIL and take over its operations. VIL was apparently insolvent and without options.
Chahine eventually developed a strategy to protect Wong from liability. He essentially became the face of, and was installed as, president and director of 2305 (another of Wong’s corporations. Chahine eventually used 2305’s security over the manufactured auto parts as leverage to negotiate continued supply from the Chinese manufacturers and better prices from Chrysler.
With Chahine’s assistance (but without any capital investment from him) Wong and 2305 were eventually able to recover approximately $10 million and successfully restructure.
Original Trial Decision
The trial judge accepted Chahine’s evidence that he and Wong had orally agreed, at a meeting that took place in December 2011, that any windfall amounts from the approximately $10 million that was recovered by 2305 would be split between fifty-fifty between the two men.
The trial judge relied on various emails and several witnesses who testified that Wong referred to Chagaine as his “equal partner” in 2305 on multiple occasions. He also found that Chahine had invested hundreds of hours helping Wong with the restructuring of 2305
The trial judge rejected Wong’s evidence that he and Chahine never got past an initial agreement that each of them would receive shareholder loans of $3.5 million each from 2305. He found that Wong was not a credible witness and he found that Chahine was credible as his evidence was consistent throughout.
The trial judge employed the flexibility of the oppression remedy to enforce the oral agreement between the parties.
The Divisional Court Decision
The Court emphasized that courts reviewing a lower court’s decision have “limited” powers to interfere with an oppression remedy decision. Indeed, s.248(3) of the OBCA empowers a court, upon making a finding of oppression, to make any order “it thinks fit”.
In this case, the Divisional Court found that the trial judge had used the oppression remedy “properly” to give effect to the beneficial ownership that Chahine had in 2305, even if he had never been issued his half of the shares, and even if he hadn’t contributed any capital towards 2305.
Chahine was essentially awarded beneficial ownership as a means of recognizing the efforts he put into restructuring and saving VIL. The Divisional Court noted:
The trial judge found that [Wong] agreed with [Chahine] that he would receive 50% of the shares in 2305 in addition to a shareholder loan of $2.8 million in return for the services he provided in assisting [Wong] with the financial restructuring of his VIL business. The fact that [Wong] did not take steps to actually have 2305 issue 50% of its shares to [Chahine] in accordance with their agreement, does not affect the fact that [Chahine] met the definition of complainant under section 245 of the OBCA and as a result, he was a proper person to make [an application under the oppression remedy]. [Wong] has not identified any error made by the trial judge in awarding [Chahine] 50% of the common shares of 2305 pursuant to his agreement with [Wong], who had control of the company, and simply failed to take the required steps, as per his agreement, to issue the shares to [Chahine].
Based on the above, and on a review of the evidence, both the original trial judge and the Divisional Court concluded that the reasonable expectations of both parties had to be considered and that Chahine’s efforts in assisting Wong could not be ignored.
Eli Karp is an experienced commercial litigator with a focus on the financial elements of various 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.