Wi2wi Corp V.YTY

FYI - Came up on Google Alerts

[MilitaryMan]

https://mccagueborlack.com/emails/articles/oppression.html?utm_source=Mondaq&utm_medium=syndication&utm_campaign=View-Original

In the recent decision of Wilson v Alharayeri,¹ the Supreme Court of Canada unanimously found that directors and officers of a corporation can be personally liable for corporate oppression pursuant to section 241 of the Canada Business Corporations Act ("CBCA"). In doing so, Ct J., writing for the Court, clarified the test for when personal liability may be imposed on corporate directors for oppression.

Ultimately, this decision broadens the application of the oppression remedy and exposes corporate directors and officers to a greater risk of personal liability.

Facts

The Respondent, Ramzi Mahmoud Alharayeri, was the President, the Chief Executive Officer, a significant minority shareholder, and a director of Wi2Wi Corporation (the "Corporation). While the Corporation was in the process of negotiating a merger with another business, the Respondent entered into a private agreement to sell some of his shares in the Corporation to the same business.² The Board of the Corporation reprimanded the Respondent for concealing the private agreement, causing the Respondent to resign as President, CEO, and director.³ The Appellant, who was another director of the corporation, became the Corporation's President and CEO.⁴

The Board subsequently decided to issue a private placement to its common shareholders. This private placement had the effect of diluting the proportion of common shares held by any shareholder who did not participate in it.⁵ Before the private placement, the Board accelerated the conversion of Class C preferred shares held by the Appellant into common shares even though the financial test for share conversion had not been met.⁶ However, the Board refused to allow the Respondent to convert his Class A and Class B preferred shares into common shares, even though they met the applicable financial test.⁷ As a result of the private placement, the Respondent's proportion of common shares was significantly reduced.⁸ The Respondent filed an application for oppression under section 241 of the CBCA against four of the Corporation's directors, including the Appellant and the chair of the audit committee.⁹

The Quebec Superior Court found that the Appellant and the audit committee chair were personally liable for refusing to convert the Respondent's Class A and B shares, and for prejudicing his rights as a shareholder through the private placement.¹⁰ The trial judge awarded the Respondent $648,310 in compensation.¹¹

The Quebec Court of Appeal upheld the findings of the trial judge. The Court concluded that personal liability was justified because the Appellant and the audit committee chair played a lead role in advocating against the conversion of the Respondent's shares.¹²

On appeal to the Supreme Court of Canada, the issue was whether the trial judge exercised the appropriate remedial discretion under the CBCA by holding the Appellant personally liable for oppression.¹³

Principles for Imposing PersonalLiability on Directors

The Supreme Court of Canada affirmed the established two-pronged test for personal liability of directors outlined in Budd v Gentra Inc.¹⁴ Under the Budd test, directors can be held personally liable for oppression where: (1) the oppressive conduct is properly attributable to the director because he or she is implicated in the oppression; and (2) the imposition of personal liability constitutes a "fit" remedy considering all the circumstances.¹⁵

The Supreme Court also outlined four guiding principles that courts should utilize to fashion "fit" orders under section 241(3) of the CBCA:

1. The oppression remedy request must be in itself a fair way of dealing with the situation. This may be the case in situations where: (1) directors have derived a personal benefit; (2) directors have increased control of the corporation; (3) directors have breached a personal duty they owe as directors; (4) directors have misused corporate power; or (5) a remedy against the corporation would unduly prejudice other security holders.¹⁶
2. The order must go no further than necessary to rectify the oppression. The goal of the order should be to correct the injustice between the parties.¹⁷
3. The order may only serve to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders. It may not respond to expectations arising by virtue of personal relationships and may not serve a purely tactical purpose.¹⁸
4. The court should consider the general corporate law context in exercising remedial discretion. This means that director liability cannot be a substitute for other forms of relief, particularly where other forms of relief may be more appropriate in the circumstances.¹⁹

However, the Court cautioned that fashioning a fit remedy is a fact-dependent exercise and that the four principles outlined above should serve as illustrative guideposts and not a closed set of criteria.²⁰

Application to this Case

Applying the principles outlined above, the Supreme Court upheld the trial judge's decision to impose personal liability on the Appellant for oppression. The Court found that the oppressive conduct was attributable to the Appellant because he, along with the chair of the audit committee, played the "lead role" in refusing to convert the Respondent's Class A and B shares.²¹ The Court also found that personal liability was fit in the circumstances because, as a consequence of his oppressive conduct, the Appellant increased his control over the Corporation to the detriment of the Respondent.²² Moreover, the Court stated that the remedy went no further than necessary in rectifying the Respondent's loss and was fashioned to vindicate the Respondent's rights as a Class A and B shareholder.²³

Conclusions and Implications

The Supreme Court in Wilson v Alharayeri established a framework for determining when to impose personal liability on directors for oppression and confirmed that the oppression remedy remains a flexible remedy in the appropriate circumstances. This decision also confirms that there is now a broader application of the oppression remedy and greater personal exposure of directors and officers to liability for oppressive conduct. In the future, directors and officers will have to be more forthright in their dealings with the corporation or will risk being held personally liable for oppression. This case strongly emphasizes the need of directors to be wary of and always declare conflicts of interest. Furthermore, this decision can assist counsel in advising on whether a director or officer will be held personally liable for oppression in future cases.