Wilson v Alharayeri: Personal Liability of Directors for Oppression

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On July 13, 2017, the Supreme Court of Canada released Wilson v Alharayeri, 2017 SCC 39 [Wilson], in which it unanimously reaffirmed that a corporation’s directors, as opposed to the corporation, may be personally liable in an oppressive action. This provided much-needed clarity on the scope of potential personal liability of directors and officers under the oppression remedy.

In this article, I will provide an overview of oppression remedy in the Canada Business Corporations Act (“CBCA”) and Ontario’s Business Corporations Act (“OBCA”). Most provinces have similarly-worded oppression remedy provisions in their corporate legislation, making this decision nationally applicable. I will then summarize the factual background of Wilson and detail the Court’s decision, focusing on the two-pronged test for personal liability in oppressive actions. Finally, I will explain why I believe that the Court’s decision in Wilson is practical and well-reasoned, and does not impose an unreasonable burden on directors and officers of corporations.

Oppression Remedy

Most Canadian corporate statutes, including the CBCA and OBCA, allow a corporation’s stakeholders to obtain relief where a court is satisfied that any of the following leads to results that are oppressive, or unfairly prejudicial to, or unfairly disregards a stakeholder’s interests: (i) an act or omission of the corporation or any of its affiliates; (ii) the manner in which the business or affairs of the corporation or any of its affiliates are or have been carried on or conducted; or (iii) the manner in which the powers of the directors of the corporation or any of its affiliates are or have been exercised.

Oppression actions are examined on a case-by-case factual basis; conduct that is oppressive or unfairly prejudicial in one case may not necessarily be found to be so in another case. However, historically and in BCE Inc. v 1976 Debentures, 2008 SCC 69, the courts have found that the following actions can amount to oppression: appropriating a corporate opportunity; defensive tactics employed to defeat a hostile takeover bid; squeezing out a minority shareholder; failing to disclose related party transactions; changing corporate structure to drastically alter debt ratios, paying dividends without a formal declaration; preferring some shareholders with management fees and paying directors’ fees higher than the industry norm; favouring a director by failing to properly prosecute claims; improperly reducing a shareholder’s dividend; or failing to deliver property belonging to the claimant.

Courts have broad discretion to make “any interim or final order it thinks fit” to rectify the actions or conduct that is found to be oppressive. In Wilson, the Court affirmed that oppressive actions allow courts power to hold directors and officers personally liable for their conduct and clarified the circumstances in which conduct would be deemed to be oppressive.

Factual Background

From 2005 to 2007, Ramzi Mahmoud Alharayeri (“Alharayeri”) was the President, Chief Executive Officer, a significant minority shareholder and director of Wi2Wi Corporation (“Wi2Wi”), incorporated under the CBCA. In early 2007, Alharayeri began negotiating the merger of Wi2Wi with Mitec Telecom Inc. (“Mitec”), concerned by Wi2Wi’s recurring cash flow issues. Alharayeri entered into a share purchase agreement with Mitec to sell his personal common shares without notifying Wi2Wi’s Board. When the Board learned of Alharayeri’s proposed sale of shares and failure to disclose his conflict of interest, Alharayeri resigned from his position of President, CEO, and Director.

After Alharayeri’s resignation, Andrus Wilson (“Wilson”) became Wi2Wi’s President and CEO. While the merger between Wi2Wi and Mitec did not occur, in response to Wi2Wi’s continuing financial difficulties, Wi2Wi’s Board decided to issue convertible secured notes by way of private placement to its existing shareholders. Before the private placement, the Board accelerated the conversion of Class C preferred shares owned by Wilson, notwithstanding the doubts the audits expressed as whether the financial test for Class C share conversion had been met. As a result of this, Wilson was able to increase his control over Wi2Wi. Meanwhile, the Board refused to convert Class A and Class B preferred shares (all solely owned by Alharayeri), despite the fact that those share classes did meet the financial test. In effect, these actions prevented Alharayeri from participating in the private placement and substantially diluted his holdings in Wi2Wi, significantly reducing the value of Alharayeri’s common shares.

Alharayeri filed an application under s.241 of the CBCA for oppression against several of Wi2Wi’s directors, but particularly Wilson and Dr. Hans Black (“Black”), another shareholder and Chairperson of the Audit Committee. Both Wilson and Black had advocated against converting Alharayeri’s Class A and B preferred shares in Board meetings based on his conduct during the merger negotiations with Mitec.

The Test

Writing for the Court, Justice Côté confirmed the general two-pronged test for personal liability set out by the Ontario Court of Appeal in the 1998 case of Budd v Gentra, 111 OAC 288 [Budd]. More importantly, Justice Côté also provided important clarity on the application and factors considered under the two prongs from Budd. Both inquiries are fact-specific inquiries that turns on equitable considerations. The test for personal liability requires:

  • That the oppressive conduct be properly attributable to the director because of his/her action or inaction; and
  • That the imposition of personal liability be fit in all the circumstances.

With respect to the second prong, the Court elaborated four general principles to guide courts in determining whether it is appropriate to assign personal liability:

  • The oppression remedy request must in itself be a fair way of dealing with the situation. Indicia of fairness include, but are not limited to: where directors have derived a personal benefit, in the form of an immediate financial advantage or increased control of the control; where directors have breached a personal duty they owe as directors or have misused a corporate power; where a remedy against the corporation would unduly prejudice other security holders; and where a director has acted in bad faith and has obtained a personal benefit.
  • Any order made under s.241(3) should not go further than necessary to rectify the oppression.
  • Any order made under s.241(3) may serve only to vindicate the reasonable expectations of security holders, creditors, directors or officers in their capacity as corporate stakeholders.
  • A court should consider the general corporate law context in exercising its remedial discretion under s.241(3). Director liability cannot be a surrogate for other forms of statutory or common law relief, particularly in circumstances where other such relief would be more appropriate.

Decision Overview

Applying the test for personal liability of directors and officers in oppressive actions, Justice Côté upheld the trial judge’s decision to hold Wilson and Black personally liable and order them to pay compensation to Alharayeri. Deferring to the trial judge’s findings of fact on the first prong, 2014 QCCS 180, Justice Côté found that the oppressive conduct was properly attributable to Wilson and Black. Wilson and Black were the only members of the audit committee and they played lead roles in Board discussions that resulted in the non-conversion of Alharayeri’s Class A and Class B preferred shares.

On the second prong, Justice Côté once again affirmed the trial judge’s findings, and found that Black and Wilson personally benefitted from the dilution of Alharayeri’s shares. Moreover, Wilson also benefitted from the conversion of Alharayeri’s Class C preferred shares. As a result of this, Wilson was able to participate in the private placement and increase his control over Wi2Wi to the detriment of Alharayeri. Further, the Justice Côté remarked that the remedies that the trial judge ordered went no further than necessary to rectify the oppression, and were appropriately fashioned to vindicate Alharayeri’s reasonable expectations as a Class A and Class B preferred shareholder.

Takeaways

One of the primary concerns expressed by the business community on the Court’s approach to personal liability in Wilson is that the Court’s decision will increase directors’ and officers’ exposure to litigation, whether or not such claims are ultimately successful. This concern is exaggerated. The Court’s approach to the oppression remedy in Wilson is more a confirmation of existing jurisprudence than revolutionary. The Court confirms that the oppression remedy test is effectively the test that the Ontario Court of Appeal established twenty years ago in Budd. Since then, as the Court identified, Budd has been “applied and endorsed by courts across the country.” In Wilson, the Court merely provided clarity on the application of the test and factors considered in the Budd personal liability test. It did not introduce a new personal liability test or lower the bar for personal liability:

It is apparent that Canadian courts are unsettled as to when the guidance in Budd should lead to the imposition of personal liability. Unsurprisingly, then, the jurisprudential debate in this appeal centred on the content of the personal liability “test.”

However, Wilson does broaden the scope of situations in which directors’ and officers’ personal liability may be triggered. While Wilson did not submit that Budd was wrongfully decided, he urged the Court to adopt necessary criteria to govern the imposition of personal liability in every case. Specifically, Wilson submitted that oppressive conduct should be attributable to a director only where three criteria are met: (1) where a director has control of the corporation, (2) where a director acts in bad faith using the corporation to advance his or her personal interest, and (3) where the director has obtained a personal benefit at the expense of the oppressed party. The Court chose not to adopt necessary criteria, stating that while any of the three criteria may be considered as factors in determining whether it is fit to impose personal liability or not, oppression remedy should not be limited to a restrictive criterion:

 … s. 241 ’s remedial purpose lies in applying general standards of commercial fairness given that the sometimes “clumsy tools” of the common law failed to promote such standards … Realizing this purpose may require imposing personal liability on a director where the director is not a controlling shareholder but is nevertheless implicated in the oppression. For example, where otherwise fit, it may be open to a court to impose liability on a director who strongly advocates for an oppressive decision motivated by a personal gain unique to that director, despite lacking control. But adopting the appellant’s [Wilson] proposed control criterion would preclude this.

Oppression remedy is an equitable remedy that seeks to ensure fairness. It provides courts with a broad, but equitable jurisdiction to enforce “not just what is legal but what is fair.” Courts are expected not to just look at narrow legalities, but business reality. By not adopting the necessary criteria Wilson proposed and keeping the personal liability test broad, courts are able to maintain the necessary flexibility to fashion the oppression remedy. There will be situations where the proposed criteria may not be satisfied, but not imposing personal liability on a director or officer would result in an inequitable outcome. The Court provides a great example: the situation where a director seeks to punish a shareholder for interpersonal reasons, but derives no personal quantifiable benefit. Adopting Wilson’s criteria would preclude a court from finding a director liable in such and other similar circumstances.

Further, from a practical point of view, a broader test for personal liability prevents directors and officers from undertaking specific actions to immunize themselves from personal liability for oppressive conduct. For example, let’s assume that a necessary criterion of the personal liability test in oppression remedy cases is whether a director or officer has control over a corporation. In Wilson, the fact that Wilson and Black were the only members of the audit committee and that they played leading roles in the Board discussions resulting in the non-conversion of Alharayeri’s preferred shares could establish control. Going forward, directors and officers could organize their conduct in a way specifically to avoid liability. Directors and officers could set up larger management committees or avoid playing “lead roles” in Board discussions, yet still act to effect oppressive consequences. However, by organizing their conduct in a specific way, directors will effectively immunize themselves from personal liability. Thus, if the Court adopted any necessary criterion, there would be a risk that directors and officers, who otherwise should be personally liable, would be found not to be liable for the simple reason that they either did not meet the restrictive criterion, or organized their conduct to specifically avoid liability. Effectively, directors and officers would be able to “contract out” of their liability.

Concluding Thoughts

Wilson provides much-needed clarity on the scope of directors’ and officers’ personal liability under the oppression remedy. Nevertheless, the case has left significant room for further interpretation of the circumstances in which an oppression remedy will be appropriately granted. This flexibility is critical to ensure that the personal liability test is not too narrow to make it easy for directors and officers to arrange their conduct accordingly. At the same time, it provides enough room to expand for the changing organization of businesses and their conduct. Corporate directors should take note of the decision, but rest assured that they won’t be unreasonably held liable for taking action that is in a corporation’s best interests.

 

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