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Options for Minority Shareholders – Oppression and Derivative Relief

Options for Minority Shareholders – Oppression and Derivative Relief

You and your business partners own a company called Alberta is Great Ltd. (“AGL”). You own 15% of the shares in AGL and your partners own the rest. One business partner is the President, a director and has responsibility for day-to-day operations at AGL. You have discovered that they are causing some business opportunities of AGL to be diverted to other companies that they control. You also have discovered that AGL is buying goods and services and renting property from other companies in which your business partner has a financial interest. It also appears that there is an issue with how certain expenses are being allocated between and/or applied to AGL and your partner’s other companies.

You are upset with these events given AGL, along with your minority shareholder interest, is being compromised by your partner’s conduct. You wonder what you can do about it given you are a minority shareholder. Fortunately, there are steps you can take and corporate law has evolved from the standpoint of “majority rules” to provide you with a variety of possible relief from the situation. 

Notwithstanding any contractual rights you may have in a Unanimous Shareholders Agreement or otherwise, the two main legislation based remedies afforded to you are the oppression remedy provided for in the Alberta Business Corporations Act, RSA 2000, c. B-9 (the “Act”) and the derivative remedy also provided for in the Act. Both of these actions involve the commencement of a proceeding at the Alberta Court of King’s Bench if the issue cannot be resolved without litigation.

At its most simple, oppression actions are aimed at protecting the interests of corporate stakeholders whose interests have been unfairly prejudiced or disregarded. A stakeholder is primarily a minority shareholder but may also include a director or officer of a corporation and any other person who the Court determines is a proper person to make an application (dismissed non-shareholder employees have even been found to be stakeholders in wrongful dismissal actions). 

Derivative actions are concerned with protecting the interests of the corporation from harm by people in control of the corporation or by others outside the corporation. The two remedies are at their heart, fundamentally different but in practice, can have similar results given that a harm to the corporation will often be a harm to the personal interests of a stakeholder.

Oppression Action

The oppression remedy is extremely broad and flexible. Essentially, the Court is given the discretion to award anything it sees fit to remedy what it deems an unfair situation. Such a broad mandate allows the Court to examine the “oppression” of a minority shareholder (or any stakeholder) and if appropriate, effectively overrule what the majority has chosen to do in the circumstances. 

The leading two-part test for oppression from the Supreme Court of Canada is as follows:

  1. Does the evidence support the reasonable expectation asserted by the claimant? 
  2. Does the evidence establish that the reasonable expectation was violated by conduct falling within the terms of oppression, unfair prejudice or unfair disregard of a relevant interest?1 BCE Inc. v. 1976 Debentureholders, [2008] 3 SCR 560

In the fact scenario presented above, you would qualify as a complainant as that is defined in s.239(b) of the Act. Case law establishes that you as complainant will also bear the burden of meeting the above noted test and establishing your reasonable expectation and that it was disregarded unfairly. 

Your expectation that, in the fact scenario above, your business partner would not take opportunities away from AGL and generally not take actions that prejudice you, as a shareholder of AGL, in respect of contracts and expenses, must be reasonable from an objective point of view. In this case, it would appear you would be entitled to an expectation that your partner would not divert business to their other companies, contract for goods and services that prejudice AGL and benefit them and/or misallocate expenses in that regard. 

If you can establish your expectations were reasonable in the circumstances, you must go on to the second part of the test to establish that your interests were limited unfairly. It is not enough to simply prove harm was done. You must prove there was unfair conduct that is in the nature of abuse or in bad faith. In this regard, it must remembered that there is deference to the business judgment of directors in taking into account various interests at play with respect to corporate decisions. However, based on the facts presented above, it would certainly seem your interests in that case were being limited unfairly. 

If you are successful with your oppression action, the Court can award a wide variety of remedies to fit the situation including such things as ordering or prohibiting certain acts of the corporation, appointing or removing directors or directing a shareholders’ shares be purchased. 

Derivative Action

Derivative relief gets it origins in the concept of the corporation having its own separate legal existence. As its own entity, the corporation is able to take steps on its own and assume its own liabilities. If you were to bring a derivative action on the above facts, you would be stepping into the shoes of AGL and suing your partner on its behalf for the harm that AGL has suffered due to your partner’s actions. One common cause of action in a derivative claim is for breach of fiduciary duty of a director. In this case, that would be the breaches of your partner to AGL. Given directors only owe a fiduciary duty to the corporation, this is an example where a derivative action may be advisable and oppression remedy would not be appropriate. 

Before you would be allowed to take this action, the Act requires you to obtain permission or “leave” of the Court in the case of a derivative action. Given the outcome of a derivative action will bind all shareholders of the company, this is an extra step to ensure the claim is not frivolous and bound to fail. The fact the company must pay the legal fees is also a factor in justifying this permission step. Also, notice to all directors of an application for leave must be given. The main test for obtaining leave to bring a derivative action is that the legal action is in the best interests of the company.   

Which Option Should I Choose?

Actions for oppression and derivative relief can proceed in parallel. Practically, they often will run in tandem with common questioning and trial. However, it is often the case that a disgruntled shareholder will proceed only with an oppression claim given leave is not required and the Court is afforded such a wide bandwidth of remedies. In some cases, a derivative action, either on its own or in tandem with an oppression claim, may be advisable where the cause of action cannot be advanced in any other manner.

The commercial litigation team at Carscallen LLP is experienced in corporate stakeholder disputes and can assist you with obtaining any relief you are owed.

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     BCE Inc. v. 1976 Debentureholders, [2008] 3 SCR 560
*This update is intended for general information only on the subject matter and is not to be taken as legal advice.

Posted: November 30, 2022

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