Oppression Remedies – A Matter of Substance Over Form

Both the Canada Business Corporations Act and the Business Corporations Act in Ontario provide for an oppression remedy available to any of a corporation’s shareholders, directors, creditors or officers as a result of unfairly prejudicial or oppressive conduct of the corporation.

Recently, the Supreme Court of Canada released its decision in Menillo v. Intramodal Inc., an oppression remedy case where two friends incorporated a road transportation company in 2004. However, the friends rarely complied with the requirements of the Canada Business Corporations Act or reduced anything in writing, not even their agreement as shareholders. The following year, in 2005, one of the friends sent a letter to the corporation indicating his resignation as an officer and director of the corporation. Yet the usual corporate documents were not filed to reflect this. The friend later insisted on his rights as a shareholder, asserting that his status within the corporation was never formally observed, and claimed an oppression remedy.

The Supreme Court of Canada rejected the friend’s appeal, relying on the trial judge’s factual findings that, from 2005 on, the friend was effectively no longer a shareholder. In reaching this conclusion, the court noted the two elements of an oppression claim:

  1. The claimant must first identify the expectations he claims have been violated and establish that the expectations were reasonably held;
  2. The claimant must then show that the reasonable expectations were violated by conduct that was oppressive, unfairly prejudicial to or unfairly disregarding of the interests of any security holder, creditor, director or officer of the corporation.

In a decision based on substance over form, the court concluded that the appeal was groundless. There was no reasonable expectation of being treated as a shareholder in light of the 2005 resignation, despite the corporation’s failure to comply with legal formalities. In essence, a corporation’s failure to comply with legislative requirements does not, on its own, constitute oppression. Rather, it is conduct that frustrates reasonable expectations that trigger the oppression remedy, not conduct that is contrary simply to the legislation.

A recent decision of the Ontario Superior Court of Justice is illustrative of the emphasis of substance over form in oppression remedy claims.

In Levine et al. v. 1751069 Ontario Inc. et al., a respondent shareholder of a corporation entered into a memorandum of understanding with the applicants who were designated as shareholders of the corporation under a will. The memorandum of understanding provided that the applicants would receive draws as shareholders and enjoy the benefits of share ownership. When the respondent stopped the payments to the applicants, they started court proceedings for an oppression remedy.

Although the applicants were not formally recognized as shareholders within the corporate documents, the court granted the oppression remedy, requiring compliance with the memorandum of understanding. The court did so on the basis that they were clearly shareholders as a result of the bequest in the will and the respondent’s treatment of them as shareholders for years.

Both of these decisions show that when it comes to oppression remedy claims, strict compliance with formal requirements is of less importance than the substance of the conduct and the reasonable expectations of those affected by the conduct.

This article is intended only to provide general information and does not constitute legal advice. Should you require advice specific to your situation, please feel free to contact me to discuss the matter further.