Are you looking into shareholder rights and remedies? When shareholder disputes arise, mistreated shareholders may have a right to a remedy.

This article will discuss three methods in which wronged shareholders can seek a remedy:

(1) bringing an oppression claim

(2) bringing a derivative action, and

(3) applying for an investigation.

Bringing an Oppression Claim

Corporations are responsible for acting as good corporate citizens, which includes considering the interests of all their stakeholders in all their corporate actions and decisions.

An oppression claim is essential for stakeholders, particularly minority shareholders, to protect their interests in a corporation.

For example, a minority shareholder could bring an oppression claim.

This can happen if the majority of shareholders vote self-interestedly, which would consequently oppress the minority shareholders.

Types of Shareholder Remedies: From Derivative Suits to Injunctions

An oppression claim could be brought if the majority of shareholders are preventing the minority shareholders from participating in the corporation’s profits.

The Court determines that a corporation or its directors have acted oppressively, unfairly prejudicial to or that unfairly disregards the interests of any shareholder.

They can also assist the corporation’s creditor, director, or officer. The court may then order to resolve the matter in various ways.

Shareholder Rights And Remedies

Oppression is an umbrella term that encompasses oppressive conduct, unfair prejudice, and unfair disregard. There are no absolute rules regarding using these terms, and they often overlap.

“Oppressive conduct” includes conduct that is coercive, abusive, suggestive of bad faith, and burdensome.

It could also be actions that are harsh, wrongful, abuse of power, or a visible departure from standards of fair dealing.

Conduct that exhibits “unfair prejudice” is similar to oppressive conduct but involves a less culpable state of mind, such as wrongfully squeezing out a minority shareholder and failing to disclose transactions involving a related party.

The Importance of Shareholder Agreements in Protecting Rights

I can also include paying dividends without a formal declaration, denying minority shareholders the right to inspect corporate records, or providing majority shareholders with a disproportionate economic benefit.

“Unfair disregard” refers to conduct that ignores a stakeholder’s interest because it is not deemed necessary, such as favouring a director by failing to prosecute claims or improperly reducing a shareholder’s dividend properly.

It is important to note that bad faith is not required to establish oppression. The primary concern is the effect of the conduct, not the intention behind it.

Where oppression is established, the oppression remedy is available.

The Test for Oppression

Whether corporate conduct qualifies as oppression is based on assessing the reasonable expectations of the complainant within the context of the existing relationship between the parties.

It is a fact-specific evaluation. Hire a lawyer or paralegal to examine your shareholder rights and fight for remedies.

To assert a claim for oppression, a complainant must establish

1. He or she had a reasonable expectation, and

2. The failure to meet this reasonable expectation involved unfair conduct that led to prejudicial consequences.

In the first step of the test, the expectation must be objectively reasonable in the circumstances.

In determining whether an expectation is reasonable, the Court may consider many factors, including general commercial practice and the nature of the corporation.

Common Violations Against Shareholder Rights and How to Address Them

It can also include the relationship between the parties, past practices, and the steps the claimant could have taken to protect himself.

Representations and agreements between the parties must also be considered.

Any conflicting interests between corporate stakeholders must also be considered.

If the Court finds that the complainant’s expectation was reasonable, it moves on to the second step of the test.

In this part of the test, the Court must determine whether the unfair conduct resulted in the prejudicial consequences the complainant brought forward.

It must be determined if this amounts to “oppressive conduct”, “unfair prejudice” or “unfair disregard” of his or her interest.

The Court must be satisfied that the conduct falls under one of these terms.

Remedies for Oppression and Shareholder Rights And Remedies

If oppression is found, the Court has broad discretion to make any order to remedy it.

Examples of commonly used remedies include orders for the corporation to do the following:

• restrain the oppressive conduct
• appoint a receiver
• amend the articles or by-laws
• amend a unanimous shareholder agreement
• direct an issue or exchange of securities
• appoint new directors
• purchase securities of a security holder
• set aside a transaction or contract
• compensate the complainant
• direct an investigation
• require a trial

The Court may order to wind up the corporation as a last resort.

The remedy ordered by the Court must be a fair way to deal with the situation and should go no further than necessary to rectify the oppression.

A Typical Oppression Claim

In most oppression cases, the complainant is a minority shareholder in a closely-held corporation.

This is because, in closely-held corporations, minority shareholders cannot simply sell their shares on the open market if they are being mistreated.

Instead, minority shareholders must use the remedy of oppression to protect their interests.

The most common remedy in this situation is an appraisal, which is where the corporation is forced to buy back the shares of the minority shareholder at an appraised value.

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Bringing a Derivative Action and Shareholder Rights

A derivative action allows a complainant to bring an action on behalf of the corporation when the corporation refuses to bring the action itself.

The complainant is usually a shareholder but may also be the corporation’s director, officer, or creditor.

The action must be aimed at righting alleged wrongs committed against the corporation, not against the individual complainant.

Derivative actions usually allege a breach of fiduciary duty, conflict of interest, fraud, breach of the duty of care, or mismanagement.

A court must grant a complainant’s permission, called “leave, ” before they can bring a derivative action.

To grant leave, the Court must be satisfied that

1. The complainant has given reasonable notice to the directors of the corporation of its intention to seek to leave to begin a derivative action; and

2. The complainant is acting in good faith; and

3. It appears to be in the corporation’s interests to bring the action.

Once leave has been granted, the complainant can assume the corporation’s role and prosecute or defend the action.

The remedies in a derivative action are limited to the standard remedies available for whichever cause of action is pleaded.

Contact us if you want to enforce your shareholder rights and look into remedies.

Applying for an Investigation

Where shareholders suspect that the corporation is acting improperly or unfairly in some way but do not have proof, they can apply to the Court.

This would be done to investigate the corporation’s affairs. Forensic accounting firms are often appointed to inspect these investigations.

In applying for an order to investigate a corporation, a complainant must satisfy the following test:

1. The complainant must be a shareholder;

2. The judge must be satisfied that one of the following appears to be true:

a) the corporation’s business is or has been carried on with intent to defraud any person.

b) the business or affairs of the corporation are or have been carried on oppressively.

c) the directors’ powers are or have been exercised oppressively.

d) the corporation was formed for a fraudulent or unlawful purpose or is to be dissolved for a fraudulent or unlawful purpose.

e) persons concerned with the corporation’s formation, business, or affairs have acted fraudulently or dishonestly.

Shareholder Rights And Remedies

The judge must evaluate the appropriateness of the investigation, considering its usefulness and reasonableness in the circumstances, as well as its expected costs and benefits.

Where an investigation has been ordered, the inspector must investigate any improper conduct and report their findings fairly and impartially.

Also, it is not their job to adjudicate or determine legal responsibility. This type of investigation is rarely ordered.