Oppression is defined under the Ontario Business Corporations Act as conduct that is “oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation”. This conduct does not need to be illegal so long as it fits the definition set out in the legislation.
When seeking an oppression remedy, the target of the claim may use the defence known as the “business judgment rule”, which states that courts are to give deference to the business decisions of the stakeholders who are best positioned to consider the needs of the company, so long as the decisions were objectively reasonable at the time. A recent decision of the Ontario Divisional Court helped clarify when this defence will be allowed.
One Shareholder’s Conduct at the Expense of the Other
Two brothers, A and B, each owned a 50% interest in their father’s road construction business, known as BE Ltd. After their father’s death, they also acquired equal shares in a company we will identify as BHL. BHL’s only asset was a gravel pit, which was used regularly by BE Ltd. in the course of its construction projects.
Just after the father’s death A, on the basis of tax advice, also incorporated a holding company known as GJBL, to act as a holding company to take advantage of a rollover under the Income Tax Act. The shares in BHL were transferred to GJBL. A was the only shareholder, officer and director of GJBL. GJBL then managed the gravel pit operation. B remained a 50% shareholder in BHL, and thus a 50% owner of GJBL.
Some dozen years later, BE Ltd sold its assets to A’s three sons who incorporated their own company, CC. CC carried on the road construction business. B also wanted his sons to be involved with CC but this request was refused. B brought an action seeking an oppression remedy against A.
The lower court found that A had oppressed B through his conduct. Firstly, A accepted the bid from his sons to purchase the gravel pit from GJBL without B’s knowledge. B was not consulted with respect to the terms or the price, and the parties did not obtain a current appraisal. Further, when B requested that his sons also become involved in the new venture, he was rejected for reasons unknown.
Secondly, prior to the purchase, A arranged to provide his sons with a very favourable rate of $0.45 per tonne of gravel. A asserted that this was intended to be for just one year, however, the price remained the same for four years. This deprived B of his right to a reasonable return on his 50% interest in the business. Given these facts, the court found that A had oppressed B through his conduct.
The defendants appealed these findings.
Test for Oppression
There are two related requirements which must be established in a claim for oppression based on the Supreme Court of Canada’s decision in BCE Inc. v. 1976 Debentureholders (2008):
- Does the evidence support the reasonable expectation asserted by the claimant?; and
- Does the evidence establish that the reasonable expectation was violated by corporate conduct that was oppressive or unfairly prejudicial to or unfairly disregarded the interest of the complainant?
One ground of appeal was that there was no direct evidence of B’s reasonable expectations. The ONSC responded by citing the decision of the Ontario Court of Appeal (ONCA) in Ford Motor Company, Ltd. v. Ontario Municipal Employees Retirement Board (2006), which held that there was no requirement for shareholders to testify as to their expectations. The ONCA, in that case, held that the existence of reasonable expectations was an objective fact to be proven by drawing reasonable inferences from the evidence.
Business Judgement Rule
The second ground of appeal was that the pricing A set with respect to the gravel was a legitimate business decision and that based on the business judgment rule, it was unfair and improper to re-evaluate the decision in hindsight. A large tax rebate some four years later had significantly improved BHL’s financial picture. In 2013, it was just breaking even.
The appeal court rejected this argument. The rule had no application here as A had run the affairs of BHL for the benefit of CC (his sons’ company) and therefore at the expense of B. A’s actions and conduct were oppressive against B and the finding that B had a reasonable expectation of a return from BHL’s only and diminishing asset, the gravel pit.
Claims for oppression can be tricky when viewed in light of the business judgment rule. Potential litigants should seek the advice of an experienced corporate litigation lawyer to fully assess their position before bringing a claim in order to protect their interests.
Contact Milosevic & Associates in Toronto for unparalleled representation in even the most complex corporate and commercial litigation disputes. Over the years, our team of exceptional litigators has seen it all and has successfully fought for our clients’ rights. Our impressive track record speaks for itself. Call us at 416-916-1387 or contact us online for a consultation.