The oppression remedy protects individuals with an interest in a corporation from corporate actions that are harmful by protecting their reasonable expectations. If a claimant can show unfair conduct by a corporation resulting in prejudice to their interests, the oppression remedy enables a court to intervene.
Because the key to the remedy is a focus on whether reasonable expectations were breached when disputes arise it can be very helpful to be able to use the shareholder agreement to demonstrate those expectations. This will prove insightful where a company is growing and taking on financing and investors whose intentions for the company may not align with the founders. The decision in Phillips-Lubimiv et al. v. Creekside Investments Incorporated et al., illustrates how courts navigate these tensions in the course of business dealings.
Business Sought to Remove President After Alleging a Breach of Duties
Aaron Lyon Phillips-Lubimiv (Phillips) founded AP1 which developed beacon technology for use at airports. Phillips claimed that he and his family had invested around $250,000 in AP1 plus thousands of hours of sweat equity that was estimated to be worth $450,000. In 2015, Phillips met the principals of Creekside Investments Incorporated (Creekside) about funding for AP1. Creekside offered a loan to AP1 in exchange for 50% of the equity.
The parties then entered into two agreements: first an employment agreement in which Phillips would remain President and CEO, and secondly a Unanimous Shareholders Agreement (USA) which stated that Phillips would only cease being a director upon his disability, death, or resignation and that Phillips was to remain President until changed by a unanimous vote of the directors. Further, the employment agreement stipulated that Phillips’ employment could only be terminated by a unanimous vote of the Board, of which he was one of two directors.
Subsequently, the relationship broke down, with Creekside alleging Phillips breached the agreements and his fiduciary duties to AP1. Creekside presented Phillips with a Memorandum of Understanding which aimed to terminate his relationship with AP1, and later provided a notice of suspension which was used to justify removing him as President, CEO, and Director.
Ousted President Brings Oppression Claim
Phillips brought an application for a remedy from oppression under section 241(2) of the Canada Business Corporations Act. The oppression remedy is available where a claimant demonstrates that their specific reasonable expectations were breached by conduct that was oppressive, unfairly prejudicial or that unfairly disregarded the claimant’s interests. Phillips argued that his reasonable expectations were to run AP1 and bring his technology to market. That explained his decision to seek financing from Creekside, but it was never his expectation that Creekside would remove him from his role with AP1.
The Shareholders Agreement and Employment Agreement Set Out the Parties’ Expectations
Phillips pointed to five acts of oppression that he claimed entitled him to the remedy:
- Creekside violated the USA by suspending him as President, Director, and CEO without authority to make a suspension without Phillips’ authorization or a court order;
- Allowing another AP1 employee to hold himself out as President was a breach of the USA and Employment Agreement, and was more egregious as Phillips was not informed his role was being taken over;
- The entire suspension process was oppressive;
- His removal as a cheque signing officer without his knowledge or consent;
- The removal of company property to a new location without his knowledge.
Justice Gilmore agreed with Phillips that the USA and Employment Agreement clearly outlined the expectation that he would continue to run AP1 and that his involvement and position within the company would not be unilaterally usurped by Creekside. Both parties signed the USA, so there could be no doubt about their expectations. Also, there was no authority for Creekside to suspend Phillips; if there was a concern about his conduct, the proper course was to obtain a court order if they sought to take action that was not permitted under the USA or Employment Agreement.
Justice Gilmore found that Creekside sought to suspend Phillips from all his positions including his role as Director. That alone would have met the test for oppression, which was bolstered by allowing another employee to hold himself out as President and hiring a General Counsel without Phillips’s consent.
Investors Seeking Involvement in the Operation of a Business should Look to Shareholder’ Agreements
The Court determined that Creekside used its leverage as the sole funding source behind AP1 to attempt to gain concessions from Phillips, such as selling his shares to Creekside at cost and resigning as President, CEO, and Director under the Memorandum of Understanding. These actions were contrary to the USA and demonstrated Creekside’s objective of ousting Phillips without regard to the terms of the agreements the parties had signed. Justice Gilmore also inferred that the timing of these actions was connected to AP1 being close to earning large profits and Phillips being an obstacle to Creekside’s future plans for AP1.
The evidence supported a breach of Phillips’s reasonable expectations and a finding of oppression. As a remedy, Phillips was given the opportunity to regain control of AP1. AP1’s shares were valued at $0 with Phillips needing to pay out Creekside’s loans. Creekside opposed the remedy and argued that Phillips would “run AP1 into the ground”.
However, applying the principles in Tracey v. Tracey, it was noted that Phillips was the company founder and had the knowledge and skill to tun AP1, that he had operational control until Creekside removed him, and that Creekside was a lender and was not in the business of running technology companies.
Proving Reasonable Expectations in an Oppression Claim is Aided by Clear Contract Terms
The decision illustrates how access to the oppression remedy is centred on whether a party’s reasonable expectations were breached. As businesses evolve and obtain investors, contracts can serve as evidence of original intentions and address many conflicts that might arise.
The Toronto lawyers at Milosevic Fiske LLP are skilled litigators who regularly guide clients through complex commercial matters, including oppression claims and shareholder disputes. Our team has extensive experience and expertise advocating for our clients’ rights. Call us at 416-916-1387 or contact us online to schedule a consultation.