A recent Ontario Court of Appeal decision considered the role that agreements signed between corporate stakeholders play in an individual’s claim for an oppression remedy under the federal Canada Business Corporations Act.  The case is a useful reminder of the need for a holistic, contextual approach to the issue of oppression rather than one limited to the terms of such documentation.

Plaintiff Was a Founder and Majority Shareholder of Original Company

The plaintiff in Pereira v. TYLT Technologies Inc. (TYLTGO) was a student at the University of Waterloo, where he and another individual developed a business that used gig economy couriers to perform “last-mile delivery services” for various distributors.  A company was set up by the plaintiff and his business partner, whom the plaintiff ultimately bought out.  Another individual named Paul subsequently joined the business, becoming a shareholder with 42.5 per cent of the issued common shares (to the plaintiff’s 57.5%), and the two individuals entered into a shareholder agreement.  The agreement stipulated that the shares of Paul and the plaintiff were to vest over six months, with the shares to be fully vested at the end of that time so long as each individual was still an employee of the company.

Plaintiff Had Gone Along with Investment-Motivated Restructuring

Before the shares had fully vested under the agreement, the plaintiff and Paul re-structured the business to make it eligible for investment offered through a program based in Silicon Valley.  Specifically, they re-incorporated the company under the federal CBCA, retaining their respective ownership interests.  They also signed a new shareholder agreement and other documents, including a stock restriction agreement.  This latter agreement provided that 25 per cent of their shares would vest within the next two months, with the remainder to vest in 25 per cent annual increments over the following three years.  Additionally, this agreement contained a clause permitting the company (TYLTGO) to buy back unvested shares for $0.0001 each in the event of termination of a shareholder “for any reason” or “voluntary resignation” of a shareholder’s employment or engagement.

Thereafter, the plaintiff and Paul also signed employment agreements that included termination clauses.

Plaintiff’s Employment Terminated and Plaintiff Removed From Board

A third party named Sadhu later invested $1-million in the company.  Sadhu appointed his colleague Hussein to represent the company’s Board of Directors.  Soon after, “allegations of senior management interpersonal conflict and mismanagement arose.”  The plaintiff agreed to step aside as the company’s CEO and was replaced by Paul.  He subsequently took a short leave of absence. Upon his return, Paul and Hussein voted (as a majority of the company’s Board) to terminate the plaintiff’s employment and repurchase the plaintiff’s shares under the stock restriction agreement.  A couple of months later, they also voted to remove him as a director of the company.

The plaintiff commenced an application seeking an oppression remedy under section 241 of the CBCA.  The crux of the plaintiff’s argument was that, despite the documentation he had signed, he had been given verbal assurances by Paul and the company’s lawyer that the roles he and Paul had played in the company would not change, and any changes to the structure of the company would be made mutually.

The plaintiff’s application was dismissed, largely because it would not have been reasonable for the plaintiff to expect he would continue as an employee of the company indefinitely.  On appeal, the plaintiff argued that the application judge had erred in focusing on that issue instead of considering “his reasonable expectations as a director and shareholder of the company.”

When Will A Stakeholder Be Entitled to An Oppression Remedy?

We have previously written about the legal test that courts apply when considering whether to grant an oppression remedy.  In Pereira, the Court reiterated these principles, noting that the decision to grant such a remedy involves a two-part inquiry established by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders.  First, the plaintiff must prove there has been a breach of their “reasonable expectations” as a stakeholder, and second, that the conduct giving rise to the breach must amount to “oppression,” “unfair prejudice,” or “unfair disregard.”  In considering the first part of the test, the plaintiff “must identify the expectations that he or she claims have been violated by the conduct at issue and establish that the expectations were reasonably held.”  A court is to consider this both objectively and contextually.

Application Judge Failed to Consider All Relevant Factors

In applying the appropriate legal tests, the Ontario Court of Appeal concluded that the approach taken by the application judge had been too narrow.  The Court referred to the evidence of the plaintiff suggesting he had expected to be with the company “well beyond three years” and had expected his employment to continue because “he was the founder of the company and its majority shareholder.”  The plaintiff had also stated in his affidavit that he had expected to remain an owner of the company “unless he chose to leave” and that he and Paul would make such decisions together.  The application judge found the plaintiff’s expectation that he would hold a position with the company indefinitely unreasonable.  But the Court of Appeal noted that this was not the end of the matter.  Consideration also had to be given to whether, given the plaintiff’s role as one of the company’s founders, it was unreasonable for him to expect he would continue as an officer, director or shareholder “for some period of time at least until his shares fully vested.”

Application Judge Focused Too Much on Signed Agreements

The Court of Appeal emphasized that the application judge had focused too narrowly on the agreements signed by the plaintiff.  Indeed, the application judge had expressly indicated a concern “that a finding of oppression, in this case, would mean that a verbal agreement could supersede the clear terms of a written agreement between the parties.”  However, the Court of Appeal noted that this focus failed to consider the plaintiff’s expectations as one of the company’s founders and his history with the company.  In determining whether the plaintiff’s expectations were reasonable, the application judge should have considered the factors identified in previous caselaw, such as the company’s nature, the relationship between the parties and past practices.  Agreements signed between the parties were but one factor to consider and were not necessarily paramount.

Application Judge Failed to Consider Conflicting Interest

Another factor to be considered by courts when determining whether expectations are reasonable is “the fair resolution of conflicting interests between corporate stakeholders.”  The Court of Appeal found that the application judge had not considered this.  The Court noted that the plaintiff and Paul had given conflicting evidence on the circumstances leading to the plaintiff’s termination.  The application judge should have considered whether the plaintiff’s conduct justified his removal from his position and the divestiture of his shares.

Matter Remitted Back to Trial

The Court ultimately granted the appeal and remitted it back to the Superior Court for a trial decision since issues of credibility were involved that could not be resolved based on the record before the court.

The Pereira case is an important reminder of the need for a contextual approach to claims for oppression remedies.  While stakeholders may have entered into agreements concerning their respective roles in relation to a company, those agreements do not necessarily take priority over other factors that also play into the judicial determination of such claims.

The Corporate Lawyers at Milosevic & Associates in Toronto Offers Exceptional Representation in Corporate Oppression Remedy Matters

The corporate litigation lawyers at Milosevic & Associates in Toronto are available to provide effective and strategic advice to corporate stakeholders in relation to disputes involving oppression claims.  If you would like us to assist you, we can be reached at 416-916-1387 or via our online contact form.