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 have a responsibility to act as good corporate citizens, which includes considering the interests of all their stakeholders in all their corporate actions and decisions.
An oppression claim is an important tool 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 are voting in a self-interested manner. This would consequently oppresses the minority shareholders.
Or 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 in a manner that is oppressive, unfairly prejudicial to or that unfairly disregards the interests of any shareholder.
They can also assist the creditor, director, or officer of the corporation. It may then make an order to resolve the matter in a variety of ways.
Shareholder Rights And Remedies | What Is Oppression?
Oppression is an umbrella term that encompasses oppressive conduct, unfair prejudice, and unfair disregard. There are no absolute rules regarding the use of 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.
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 important, such as favouring a director by failing to properly prosecute claims or improperly reducing a shareholder’s dividend.
It is important to note that bad faith is not required in order 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.
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The Test for Oppression
The question of 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. If you want to look into your shareholder rights and fight for remedies, hire a lawyer or paralegal.
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.
It can also include the relationship between the parties, past practices, and the steps the claimant could have taken to protect itself.
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 resulting in prejudicial consequences brought forward by the complainant.
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 | Shareholder Rights And Remedies
If oppression is found, the Court has broad discretion to make any order it sees fit in order to remedy the oppression.
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
As a last resort, the Court may make an order to wind up the corporation.
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 the vast majority of 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 turn to the oppression remedy 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 | Shareholder Rights And Remedies
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 a director, officer, or creditor of the corporation.
The action must be aimed at righting alleged wrongs committed against the corporation, not against the individual complainant.
Derivative actions usually allege breach of fiduciary duty, conflict of interest, fraud, breach of the duty of care, or mismanagement.
A court must grant permission, called “leave”, to a complainant before they can bring a derivative action.
In order 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 leave to begin a derivative action; and
2. The complainant is acting in good faith; and
3. It appears to be in the interests of the corporation to bring the action.
Once leave has been granted, the complainant can stand in the shoes of the corporation and prosecute or defend the action.
The remedies available in a derivative action are limited to the standard remedies available for whichever cause of action is pleaded.
If you want to enforce your shareholder rights and want to look into remedies, contact us.
Shareholder Rights And Remedies | Applying for an Investigation
Where shareholders suspect that the corporation is acting improperly or unfairly in some way but do not have any proof, they can apply to the Court.
Further, this would be for an order that there be an investigation of the corporation’s affairs. Also, forensic accounting firms are often appointed as the inspectors of 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 business of the corporation 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 in an oppressive manner.
c) the powers of the directors are or have been exercised in an oppressive manner.
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 formation, business, or affairs of the corporation have in connection therewith 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’s duty is to investigate any improper conduct and report their findings in a fair and impartial manner.
Also, it is not their job to adjudicate or determine legal responsibility. This type of investigation is rarely ordered.
In conclusion, you can also watch videos about Canadian law that we created.
Author: Alistair Vigier is the CEO of ClearWay Law. If you need help with shareholder rights and remedies, reach out to us.