In a decision that has widespread impact on company directors, the Supreme Court of Canada confirmed that investors seeking an oppression remedy can sue directors personally, and not just the company itself. While affirming this, the Court also outlined restrictions and boundaries on this personal liability
Ramzi Mahmoud Alharayeri (Alharayeri) was the President, CEO, and significant minority shareholder of Wi2Wi Corporation (Wi2Wi) from 2005 to 2007. In 2007, Wi2Wi became engaged in merger discussions with another corporation and, without notifying Wi2Wi’s Board of Directors, Alharayeri agreed to sell some of his common shares entering into a share purchase agreement.
When the Board learned what was happening, Alharayeri was reprimanded for concealing the deal and not disclosing a potential conflict of interest. He ultimately resigned and Andrus Wilson (Wilson), a board member, became President and CEO.
The discussed merger ultimately did not occur, nor did the agreed to share purchase agreement.
In September 2007, the Board decided to issue a private placement of converted secured notes to its existing common shareholders. Prior to the placement the Board accelerated the conversion of Class C Convertible Preferred Shares into common shares. This was done despite doubt as to whether the financial test for such a conversion had been met.
Alharayeri’s Class A and B Convertible Preferred Shares were never converted into common shares as Wilson and another director (Black) had advocated against such a conversion in several board meetings. As a result, Alharayeri never participated in the private placement, and the value of his A and B shares and proportion of his common shares in Wi2Wi were significantly reduced.
Alharayeri ultimately filed an oppression claim against Wilson and three other Wi2Wi directors.
At Trial and On Appeal
The original trial judge found Wilson and Black solidarily liable for the oppression and ordered them to compensate Alharayeri. Wilson and Black appealed.
On appeal, the Court of Appeal found that the imposition of personal liability had been justified, noting that, as audit committee members, both Wilson and Black must both have known that Alharayeri’s A Share conversion rights had crystallized. As the only members of the audit committee, Wilson and Black wielded significant influence and used this influence to advocate against the conversion of Alharayeri’s shares while also advocating for the private placement.
Wilson had also admitted at trial that the issues concerning Alharayeri had “disappeared because he was no longer a shareholder in a position to block and be a big influence on all of the stuff that the company was doing.”
The Court of Appeal upheld the original trial decision, finding Wilson and Black solidarily liable. Wilson appealed to the Supreme Court of Canada.
The Supreme Court’s Decision: Personal Liability of Directors
The Court started by noting the two requirements of an oppression claim.
The person making the claim must:
- Identify the expectations that he or she had, which they claim have been violated by the conduct in question and establish; and
- Show that, under s. 241(2) of the Canada Business Corporations Act (CBCA), these reasonable expectations were violated by corporate conduct that was either oppressive or unfairly prejudicial, or unfairly disregarded the interests of any security holder, creditor, director, or officer.
Section 241(3) of the CBCA provides the court with broad direction to “make any interim or final order it thinks fit”, and also provides a list of available remedies where oppression is found.
The court noted, however, that while this provision grants a court discretion to grant various remedies, it does not specify situations in which it would be “fit” to hold a director personally liable.
To answer this question, the court looked to a landmark Ontario Court of Appeal decision, from which it created a two-step analysis of personal liability for directors:
- The oppressive conduct must be attributable to the director due to his or her implication in the oppression; and
- The imposition of personal liability must “fit” in all the circumstances.
To determine whether liability would “fit” in a particular circumstance, the Court outlined four criteria:
- The request for an oppression remedy must be a “fair” way of addressing the situation. For example, it might be fair to find personal liability where a director has derived a personal benefit (i.e. an immediate financial advantage, an increase in control), where a director has breached a personal duty, or where a director has misused their corporate power. It may also be fair to find personal liability where a remedy against the corporation would prejudice other security holders. The court noted that there is no fixed definition or what constitutes “fair”, since fairness must inherently be assessed on a case by case basis;
- Any order made under s. 241(3) must not go further than necessary to rectify the oppression and correct the injustice between the parties;
- Any order under s. 241(3) must remain rooted in, informed by, and responsive of security holders, creditors, directors, or officers in their capacity as corporate shareholders; and
- A court should consider the general corporate law context of exercising its discretion under s. 241(3), and director liability cannot be a surrogate for other forms of statutory or common law relief, especially when other relief may be more fitting in the circumstances.
The Court rejected Wilson’s argument that a more systematic test for director liability should be adopted, noting that a rigid test would be inappropriate where the issues are usually so fact-specific. Instead, the Court emphasized that the more open-ended test they outlined would provide better “guideposts” for making liability decisions.
What Does This Mean Going Forward?
Directors should note that any personal liability in oppression matters will be found only where liability is “fit in all the circumstances” based on the newly outlined criteria, and the director is personally implicated in the oppressive conduct. “Fairness” will form the basis for any liability found.
The Court has recognized that there are certain common scenarios in which it would be appropriate to find a director personally liable, particularly where directors place themselves in situations where their decisions may result in a personal benefit or be considered bad faith.
The court noted:
Personal benefit and bad faith remain hallmarks of conduct properly attracting personal liability, and although the possibility of personal liability in the absence of both of these elements is not foreclosed, one of them will typically be present in cases in which it is fair and fit to hold a director personally liable for oppressive corporate conduct…
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.