Mennillo v Intramodal: Oppression Remedy, Too Simple an Analysis
The oppression remedy empowers shareholders in commercial disputes by giving legal effect to their reasonable expectations of. A claim in s.241 of the Canada Business Corporations Act, RSC 1985, c C-44 [CBCA] is premised on a personal right of the shareholders. An oppression claim can be brought in a number of circumstances, including by a minority group of shareholders whose interests have been disregarded by the majority shareholders or directors of a corporation. In Mennillo v Intramodal inc, 2016 SCC 51 [Mennillo] the Supreme Court of Canada (“SCC”) looked at the oppression remedy in the context of failure to comply with CBCA formalities. The SCC re-affirmed the test for an oppression claim and outlined that the lack of legal formalities is not, without more, determinative to the issue. However, it is the strong and more nuanced dissent of Justice Côté that really steals the “show” in this case.
When Facts Are Not in Your Favour
In 2004 Mr. Mennillo and Mr. Rosati decided to create a transportation company, Intramodal Inc (“Intramodal”). Mr. Mennillo agreed to provide the capital and Mr. Rosati the expertise. The company distributed 49 shares to Mr. Mennillo and 51 shares to Mr. Rosati. Both the notices of subscription and the resolution were signed by Mr. Rosati alone. Mr. Rosati and Mr. Mennillo rarely complied with the requirements of the CBCA and almost never put anything in writing.
In 2005, after having advanced substantial amounts of money to Mr. Rosati, Mr. Mennillo sent a letter to the corporation indicating he intended to resign as an officer and director of the company. The money Mr. Mennillo had advanced the company was paid back with a hefty bonus. In 2007, when the Intramodal started doing well financially, Mr. Mennillo said that he never intended to resign as a shareholder. By this point, Intramodal had transferred Mr. Mennillo’s shares to Mr. Rosati. Mr. Mennillo applied for the oppression remedy under s.241 of the CBCA contending that the company wrongfully stripped him of his status as a shareholder.
Mr. Mennillo, The Not So Oppressed
The issue in the SCC appeal was whether the business or affairs of Intramodal were carried or conducted in a manner that was oppressive or unfairly prejudicial to Mr. Mennillo’s interests, as per s.241(2) of the CBCA. The test for an oppression remedy was set out by the Supreme Court of Canada (“SCC”) in BCE Inc v 1976 Debentureholders, 2008 SCC 69 [BCE]. Whether there has been an oppression is to be judged according to “the business realities” and not the “narrow legalities” of each case (BCE, para 58). The oppression remedy is an equitable remedy. According to BCE, what is “just” and “equitable” is judged by the reasonable expectations of the parties in the context and in regard to the relationship at play (para 59). These reasonable expectations were to be the downfall of Mr. Mennillo’s claim.
There are two elements to an oppression claim. One, the claimant must “identify the expectations that he or she claims have been violated and establish that the expectations were reasonably held” (para 70). Second, the claimant must show that those reasonable expectations were violated by conduct falling within the statutory terms of conduct that is oppressive, unfairly prejudicial to or unfairly disregarding the interests of any security holder (para 70). Due to the lack of written documents, the factual background in Mennillo was highly disputed by the parties at the trial level.
The SCC accepted the trial judge’s findings that Mr. Mennillo agreed he would remain a shareholder of Intramodal only for as long as he guaranteed the company’s debts (Mennillo, para 10). When Mr. Mennillo decided that he no longer wished to guarantee those debts, he no longer had reasonable expectation of being treated as a shareholder. The SCC found that the failure of the corporation to ensure the shares were registered according to the CBCA cannot be characterized as “oppressive, unfairly prejudicial or unfairly disregarding” of Mr. Mennillo’s interests (ibid). The SCC concluded that the fact that a corporation fails to comply with a requirement of the CBCA does not, on its own, constitute oppression unless it frustrates reasonable expectations of the shareholder (para 11).
Oppression Remedy Re-Affirmed or Improper Commercial Practices
The main finding in Mennillo is that the mere failure to comply with a technical statutory requirement is not in itself oppressive. The claimant needs to show that the corporation prejudiced and unfairly disregarded the claimant’s interest. This in turn is closely related to the shareholder’s reasonable expectations. As such, it is clear that Mr. Mennillo’s expectations in giving up his shares cannot be reconciled with his expectation to remain a shareholder.
In many ways, the finding in Mennillo is uncontroversial. Mennillo re-affirms the BCE finding that oppression claims will always be assessed in context. Commercial reality is thus essential. But this is precisely where the issue becomes a bit more nuanced. The majority in Mennillo recognizes the commercial (mis)practices at play in this appeal fails to give them any significant weight. This is partially the fault of the claimant. There were many other provisions of the CBCA that would have entitled Mr. Mennillo to bring a more successful claim. For one reason or another they were not used.
The majority did feel compelled, as a post-script, to address some points in relation to commercial law that were not pleaded by the parties. One of the important issues was that of the retroactive cancellation of shares. Justice Cromwell, for the majority, is of the opinion that it is not possible to retroactively cancel an issuance of shares by way of simple oral consent (Mennillo, para 63). The acts of the corporation could not have been valid if the requirements of the CBCA were not met.
Further, Mr. Mennillo had not endorsed the share transferred as required by s.76(1)(a) of the CBCA. However, Justice Cromwell found that it was not as a result of an improper share transfer that Mr. Mennillo was no longer the holder of the shares (para 71). It was rather because he did transfer these shares to Mr. Rosati, whether the corporation filed the proper documents or not. What is missing in the majority’s analysis is any detailed reference to Intramodal as an entity that is a party to these proceedings.
Corporate Law Principles Re-Visited
Justice Côté, a former commercial lawyer, issued a strong dissent in this case. Justice Côté argues that the trial judge and Court of Appeal completely disregarded two key principles of Canadian corporate law: the principle that a corporation’s legal personality is distinct from that of its shareholders and the principle or rule of the maintenance of capital (para 91). Justice Côté, argues that this was not a proceeding brought by Mr. Menillo against Mr. Rosati, as she sees the majority analysis practically implying. The claim is by Mr. Mennillo against Intramodal. Justice Côté rightfully points out that although Mr. Mennillo brought action through s.241 of the CBCA, he could also have brought action through s. 243 for rectification of registers or s. 247 for failure by a corporation to comply with the legislation or with its articles (para 97).
Justice Côté is critical of Intramodal’s display of willful blindness in regards to its legal duties. She also finds that Intramodal conflated its interest with that of the majority shareholder, Mr. Rosati. Justice Côté argues that the fact that one shareholder claims he and his fellow shareholders entered into an agreement for the transfer of shares does not relieve the corporate of its legal duty to make the necessary inquiries before passing a resolution approving the transfer (para 100). By not considering Intramodal’s conduct, the trial judge came close to endorsing the company’s unlawful conduct. Justice Côté implies that the closely held nature of Intramodal increases the importance of following commercial law principles and that the failure to observe formalities was in itself a form of oppression.
Personally, I think that that the oppression conclusion is a step too far in this case. However, since the majority did not say that the failure to comply with CBCA requirements will never be found to be oppressive, there might be a situation in the future where a finding of failure to comply with CBCA might contribute to the finding of oppression. In that respect, Justice Côté’s reasons are significantly more in tune with the realities of commercial practice.