The Business Corporations Act provides various remedies to a broad group of corporate stakeholders, depending on the nature of their complaint. For example, we have previously written about the oppression remedy and derivative claims. Stakeholders would do well to take note of another type of remedy available under the statute, namely the appointment of an inspector and an order for an investigation.

Judicial Power to Order an Investigation is Found in Part XIII of the Business Corporations Act

The power of a court to order an investigation is found in Part XIII of the Business Corporations Act, particularly section 161. That section grants standing to a “registered holder or a beneficial owner of a security” (or, in certain situations, the Ontario Securities Commission) to apply to a court for an order directing the investigation of a company or its affiliates. Thus, unlike other remedies such as the oppression remedy, an investigation is generally a remedy available only to shareholders.

The purpose of appointing an inspector under this section of the statute is to ensure that the company meets its central obligation to provide shareholders “with an accurate picture of its financial position” (see Akagi v. Synergy Group (2000) Inc.).

The power to appoint an inspector has been deemed a “drastic and extraordinary remedy” (see Brown v. Maxim Restoration Ltd.). It is one that a court must exercise cautiously. The reasons for this include the fact that such a remedy can have significant cost consequences (see Urbisci v. 2388095 Ontario Ltd.).

Why appoint an inspector? Courts have made clear that such an appointment is undertaken to “gather facts” and information and not to determine whether funds are used for “legitimate purposes” (see Khavari v. Mizrahi).

It is not a remedy that should be ordered to assist a court in making findings of oppressive conduct, nor is it to be used “to assist parties to prepare for litigation”, such as shareholder disputes. In other words, it is not a remedy that should be used to determine rights (see Kerbel v. Morris Kerbel Holdings Limited). In the case of litigation, other remedies available to the parties as litigants generally are to be preferred (see Brown).

Three-Part Test For Appointment of an Inspector

To obtain an order for the appointment of an inspector, an applicant must establish the following:

1. They must be a “security holder”;
2. There must be a prima facie case that one of the circumstances included in section 161(2) of the Business Corporations Act has been met; and
3. The proposed investigation must be considered appropriate in light of its “usefulness and reasonableness under the circumstances, with due consideration to its expected costs and benefits” (see Sherif Gerges Pharmacy Professional Corporation et al. v. Niam Pharmaceuticals Inc. et al.).

The first prong of the above test is relatively straightforward. A shareholder of a private company generally has standing to bring the application.

What Kinds of Situations May Trigger the Order of an Investigation?

The second prong of the test requires consideration of section 161(2). That section permits the order of an investigation if any of several situations appear to the court, including that the business of the company “is or has been carried on with intent to defraud any person,” that the company was formed “for a fraudulent or unlawful purpose,” or that a person concerned with the business of the company has “in connection therewith acted fraudulently or dishonestly.”

The section also references the kind of circumstances that may trigger an oppression remedy under section 248 – that is, a court may order an investigation if it appears the company’s business or affairs “are or have been carried on or conducted” in a way that is “oppressive or unfairly prejudicial to” the shareholder’s interests.

At this stage of the test, the evidentiary threshold is low. In other words, it will suffice if an applicant can show “there is good reason to believe the conduct complained of may have taken place” or, at a minimum, there is “an index of suspicion or appearance that reasonable shareholder expectations have not been met” (see Sherif Gerges). Having said this, it is not enough for an applicant to simply allege misconduct or raise suspicion without providing further evidence. A court will be required to review the entire record before determining if this stage of the test is met.

When Will an Investigation Be Deemed By a Court to Be Appropriate?

The third prong of the test arises from the fact that the remedy is both discretionary and extraordinary. In considering whether the appointment of an inspector is appropriate, courts should consider a variety of factors, including:

1. Whether the applicant needs “access to information”;
2. Whether that information can be acquired through better or less expensive means;
3. Whether the investigation would give the applicant a “tactical advantage”; and
4. The cost of the investigation as compared with its benefits (see Khavari).

Where a shareholder is denied access to or production of a company’s books or records, a court may order an investigation (see Alyousef v. Alyousef). However, potential applicants should be careful in resorting to this remedy for that purpose alone. For example, it has also been held that an inspector should not be appointed to inspect and audit a private company’s books “if the shareholders who wish that relief do not establish that they cannot get it privately” (see Re Baker et al. and Paddock Inn Peterborough Ltd.). The imperfect disclosure of statutorily required information may not itself constitute a basis for a prima facie case of oppression (see Urbisci). The question appears to be whether requests for production or access have been refused or ignored altogether.

Experienced Toronto Litigation Lawyers Providing Strategic Legal Guidance for Corporate Stakeholders

The path to resolving a corporate dispute is rarely straightforward. At Milosevic & Associates, our team offers the practical expertise needed to handle complex investigations and derivative claims under the Business Corporations Act. We are committed to resolving your matter in a timely and cost-effective manner. Consult with Milosevic & Associates. Get the clarity you need to move forward. Reach out via our online contact form or call us at (416) 916-1387.