The rule in Foss v. Harbottle is well established in Ontario law. The rule prevents shareholders from suing for a loss in the value of their shares brought about by a wrong done to the corporation. The rule is a consequence of the separate legal personality of the corporation. Just as shareholders (subject to limited exceptions) cannot be sued for the acts, debts, defaults or obligations of the corporation, only the corporation has a cause of action for wrongs done to it. The rule was accepted by the Supreme Court of Canada (SCC) in Hercules Management Ltd. V. Ernest & Young.
The Purpose of the Rule in Foss v. Harbottle
- First, the corporation is a separate legal entity from the shareholder(s), with the rights and obligations of a person under the law. The corporation, and not its shareholders, is liable for the corporation’s acts and defaults, and the corporation, not its shareholders, acquires causes of action when wrongs are committed against it.
- Second, the rule avoids a multiplicity of actions. Without the rule, individual shareholders would each be able to sue on the basis that a wrong done to the corporation, and via that harm, indirectly caused harm to the shareholder.
Claims by a shareholder are thus barred with respect to a wrong done to their corporation that causes a diminishment in the value of their shares. Such claims offend the rule because a wrong done to the corporation that results in a decreased share value is still the claim of the corporation as a separate legal entity. The decreased share value is simply the consequence of the wrong done to the company.
The rule does not, however, prevent a claim by the shareholder for any wrong done directly to the shareholder and otherwise not belonging to the corporation. A recent decision of the Ontario Court of Appeal illustrates this concept.
A Commercial Lease in the Shareholder’s Name
A commercial tenant, T, signed a lease with the landlord, L, in 2006. The lease was for ten years with an option to renew for a further five years. The space was to be operated as a restaurant.
In 2010, the landlord permitted T to assign the lease to her sister S. The lease was amended by agreement to increase the Minimum Rent and specified the square footage of the leased property as being 1,120 square feet. S then ran the restaurant for the next four years through her corporation. The lease, however, was never assigned to the company and remained in S’s name personally.
The complex was purchased by B in 2014. B promptly alerted S to the fact that the square footage specified in the assigned lease was in fact less than the square footage actually being used by the restaurant. B supplied an architect’s certificate to verify their claim. B also demanded that S pay additional rent based on the larger footprint being used. The increase in additional rent was due to B allocating a greater share of the complex’s total property taxes to the leased premises.
When S refused to pay the additional amounts, B locked the doors and excluded S form the premises. B’s position was that S was in default of the terms of the lease. The usual rent for the default month was paid by the tenant and accepted by B. As a result of the lockout, the business failed, and the lease was effectively terminated.
Motion’s Judge Finds for Tenant
S sued B for the return of her deposit and for damages arising from the loss of her business. Her company was added as a plaintiff shortly thereafter. B responded with a defence and counterclaim. The counterclaim was for the additional charges based on the larger space. B then brought a motion for summary judgment. The motion was decided in the tenant’s favour. B appealed to the Ontario Court of Appeal (ONCA).
ONCA: Exceptions to the Rule in Foss v. Harbottle
The rule is well established. Did it impact the ability of S to sue? Here it did not. In this case, the corporation was not the tenant and had no privity of contract with the landlord. There was not even an overlap of potential claims. The only available claim was that which had been made by the tenant. The Court stated:
[T]he rule in Foss v. Harbottle does not preclude a claim for diminution of share value when the shareholder has her own cause of action because of a wrong done to her, and the corporation, which suffered a loss but not because of a legal wrong done to it, has no cause of action.
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